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iSiiii 


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PENDING 
BANKING    LEGISLATION 


I^etters   by   oflleers  of 

THF.   ^NATIONAL     CITY     HANK     OF    NEW    YORK 

to    tlie    Banklny:    iiutl    C'urreuey    Comiultteas 

ot  the  Congrress  of  the  United  States. 


Also 
Copy  of  the  bill  as  introduced  June  26,  1913 


PUBLISHED    IJY 

THE    NATIONAL    CITY    BANK 

OF     Ni:W    YOKK 
1913 


Communications  addressed  to  the 
Hon.  Robert  L.  Owen,  and  the  Hon. 
Carter  Glass,  Chairmen,  Respectively, 
of  the  Committees  on  Banking  and 
Currency  of  the  United  States  Senate 
and  House  of  Representatives. 


Sir: 

Students  of  our  banking  situation  are,  I  believe, 
ill  substantial  agreement  upon  the  main  principles 
that  should  govern  sound  financial  legislation. 
Briefly  stated,  the  objects  aimed  at  should  be, 

(a)      The  mobilization  of  bank  reserves. 

(b).  The  retirement  of  our  present  bond-secured 
circulation  by  a  method  fair  to  the  banks  which  have 
been  forced  by  law  to  buy  Government  bonds  above 
their  investment  market  value. 

(c)      The  authorization  of  a  bank-note  currency 

which  will  be  responsive  in  volume  to  the  demands 

^  of  conmierce,  and  which  will  lay  upon  commerce  no 

^^  unnecessary  burden  of  tax  through  the  fact  that  busi- 

'  ness  men  find  it  desirable  at  certain  seasons  to  borrow 

the  credit  of  a  bank  in  the  form  of  circulating  notes 

instead  of  bank  deposits. 

In  this  connection  it  should  be  clearly  kept  in  mind 
that  the  main  ])usiness  of  a  bank  is  to  exchange  its 
credit  for  the  credit  of  its  customers.  The  customers' 
credit  is  known  to  but  a  small  circle.  The  bank's 
credit  is  known  to  a  wider  circle.  The  business  of 
banking  is  to  exchange  the  obligation  of  the  bank 
for  the  obligation  of  the  bank's  customer. 

Usually  the  customer  prefers  the  bank's  obliga- 
tion in  the  form  of  a  deposit  balance,  against  which 


-^' 


389083 


Officers  Letters. 


he  can  write  checks.  At  certain  times  he  may  find 
it  necessary  to  have  credit  in  a  form  fit  for  wider 
circulation,  and  then  he  wants  the  bank's  credit 
in  the  form  of  circulating  notes.  The  volume  of  bank 
checks,  by  reason  of  their  daily  redemption,  abso- 
lutely conforms  to  the  needs  of  commerce.  Legisla- 
tion framed  on  correct  principles  will  create  a  bank- 
note currency  that  will  as  truly  conform  to  the 
demands  of  commerce,  avoiding  alike  redundancy 
and  insufficiency. 

(d)  The  creation  of  a  discount  market.  Legisla- 
tion properly  providing  for  acceptances  and  for  the 
rediscount  of  such  acceptances  by  a  reserve  bank  will 
give  to  commerce  the  use  of  several  hundred  millions 
of  capital  that  now  forms  the  secondary  reserve  of 
commercial  banks,  and  that  must  be  so  loaned  that  a 
bank  can  at  any  time  shift  the  investment  into  other 
hands  and  convert  the  loan  into  reserve.  The  present 
call  loan  market  is  the  inevitable  result  of  that  neces- 
sity on  the  part  of  all  commercial  banks  for  a  secon- 
dary reserve,  and  of  their  inability  under  our  present 
laws  to  invest  that  part  of  their  funds  in  commercial 
paper  and  then  dispose  of  that  investment  if  the 
exigencies  of  the  bank's  business  require  a  draft  on 
the  bank's  secondary  reserve,  for  the  replenishment 
of  cash  reserves. 

Aside  from  the  economic  principles  directly  in- 
volved there  are  two  or  three  other  considera- 
tions that  legislators  must  bear  in  mind  in 
formulating  legislation.  There  is  no  other  statute 
of  so  much  importance  as  the  National  Bank 
Act  that  has  been  on  our  books  for  fifty  years 
without  substantial  alteration.  We  have  grown 
used  to  its  operations;  to  its  advantages,  and  to  its 
shortcomings.  The  shortcomings  have  been  obvious, 
but  the  conservatism  of  Congress  and  of  business  in- 
terests has  been  such  that  there  has  been  no  sub- 
stantial change  in  the  law.  It  would  now  be  one 
thing  to  take  a  clean  sheet  of  paper  and  write  an 
ideal  banking  law,  but  it  becomes  quite  another  thing 


Officers   Letters. 


to  recognize  that  the  business  of  this  great  country 
is  moving  in  channels  of  banking  service  that  have 
been  worn  by  fifty  years  of  use.  Opportunity  to 
create  new  channels  would  undoubtedly  be  better  in 
some  respects.  Nevertheless,  account  must  be  taken 
of  our  long-established  methods  and  system,  and  it 
should  be  the  aim  of  legislators  to  do  as  little  violence 
to  these  established  methods  as  is  consonant  with 
legislation  along  the  lines  of  sound  principles. 

There  is  another  feature  of  great  importance  that 
must  be  kept  in  mind.  There  is  a  fundamental  dif- 
ference between  new  legislation  affecting  the  existing 
banking  system  and  legislation  designed  to  control 
public  utilities.  A  bank  and  a  railroad  each  per- 
form public  service,  but  there  is  a  distinction  in  the 
nature  of  the  two  which  legislators  must  recognize. 
There  is  no  more  fixed  form  of  investment  than  a 
railroad.  It  cannot  be  moved;  it  must  be  operated; 
its  owners  cannot  withdraw  their  capital  and  retire 
from  the  field  or  change  the  corporate  form  upon 
which  the  life  of  their  investment  rests.  The  railroad 
has  obtained  rights  essential  to  its  life  by  public  grant, 
and  it  performs  public  service  of  a  character  making 
it  peculiarly  subject  to  Governmental  control. 

On  the  other  hand,  there  is  no  more  liquid  form 
of  investment  than  a  good  bank.  The  total  invest- 
ment can  be  promptly  liquidated  and  the  capital 
retired  from  the  field.  A  national  bank  has  received 
no  charter  rights  which  make  it  impossible  or  even 
difficult  for  it  to  change  the  form  of  its  charter  and 
reorganize  imder  state  jurisdiction.  On  the  whole, 
bank  investors  have  in  recent  years  favored  the  state 
charter  over  the  national  charter.  The  evidence  of 
that  is  found  in  the  far  more  rapid  growth  in  the 
number  of  state  banks  as  compared  with  national 
banks.  In  1896  the  number  of  state  banks  and  na- 
tional banks  w^as  exactly  the  same.  There  w^ere 
3,700  banks  imder  each  form  of  charter.  Thirteen 
years  later  the  number  of  national  banks  was  imder 
7,000,  the  number  of  state  banks  over  11,300. 


Officers  Letters. 


A  national  bank  has  enjoyed  only  four  advantages 
from  its  national  charter: 

1st.  Prestige  which  resulted  from  the  supposedly 
sound  supervision  given  national  banks  through  the 
comptroller's  examination.  Banks  in  the  smaller  com- 
munities have  found  this  prestige  of  considerable 
value  and  would  not  lightly  give  it  up.  It  is  of 
much  less  or  no  weight,  in  the  case  of  the  larger 
institutions,  and  the  improved  state  banking  super- 
vision has  in  all  cases  tended  to  make  the  distinction 
between  state  and  national  banks  grow  much  less  in 
the  public  mind. 

2nd.  The  right  to  issue  bond-secured  bank-note 
circulation.  That  has  been  of  no  great  advantage, 
because  the  bank  always  had  to  expend  more  of  its 
casli  for  bonds  than  it  received  back  in  bank  notes. 
It  has  shown  some  ostensible  profit.  In  practice, 
however,  the  calculated  profit  has  been  much  more 
than  offset  by  the  loss  resulting  from  the  decline  in 
the  price  of  Government  bonds  in  the  last  few  years. 
The  2%  bonds  have  owed  at  least  20%  of  their  market 
value  to  their  availability  as  a  basis  for  circulation. 
Banks  that  have  recognized  the  great  risk  run  in 
buying  a  bond  at  a  market  price  20%  or  more  above 
its  investment  value  in  order  to  obtain  the  small  profit 
that  could  be  made  from  keeping  out  circulating 
notes  have  appreciated  the  note  issuing  privilege  at 
its  proper  worth. 

3rd.  The  right  of  national  banks  in  reserve  and 
central  reserve  cities  to  act  as  reserve  agents  for 
otiier  national  banks  has  been  an  important  advan- 
tage. 

4th.  The  ability  of  a  national  bank  to  obtain  de- 
posits of  ])ublic  money  has  been  of  some  advantage, 
althoup:]i  the  profit  of  such  deposits  was  always  in 
part  offset  by  the  fact  that  a  bank  must  expend  more 
for  ])0)uls  with  which  to  secure  those  deposits  than  the 
amount  of  the  maximum  deposit  obtained.  Recently 
the  advantage  of  obtaining  public  deposits  has  been 

6 


(Jtticcrs  Letters. 


wholly  olt'set  when  hanks  were  eonipelled  to  pay  'l'-/o 
interest  in  addition  to  offering  hond  seeurity  for  the 
deposit. 

The  foregoing  advantages,  such  as  they  have  heen 
and  such  as  they  have  become,  have  for  some  years 
been  recognized  as  insufficient  to  determine  the  or- 
ganization of  new  banks  under  national  charters,  and 
the  natural  result  has  been,  as  before  indicated,  far 
more  rapid  growth  of  state  banks.  If  legislation 
should  be  enacted  which  tended  still  further  to  reduce 
the  value  of  the  special  advantages  under  a  national 
charter,  it  is  obvious  that  there  would  also  have  to  be 
new  and  important  advantages  granted  or  the  con- 
sideration that  would  bind  existing  institutions  to  the 
national  form  of  charter  would  be  very  slight  indeed. 

In  the  light  of  the  foregoing  considerations,  it  be- 
comes interesting,  therefore,  to  examine  the  proposed 
bill  for  reorganizing  the  banking  and  currency  system 
of  the  United  States.  The  most  needed  thing  to 
be  accomplished,  the  principle  of  overshadowing  im- 
portance to  be  recognized,  is  a  provision  for  the 
effective  mobilization  of  reserves.  The  proposed 
measure  has  partially  done  this  in  the  creation  of 
a  number  of  federal  reserve  banks,  deposits  in  which 
may  be  counted  by  member  banks  as  a  part  of  their 
legal  reserve.  In  one  way  the  sj^stem  of  regional 
reserve  banks  has  an  advantage  over  the  National 
Reserve  Association  proposed  by  the  National  Mone- 
tary Commission.  The  plan  for  a  National  Reserve 
Association  provided  that  there  should  be  a  uniform 
rate  of  discount  throughout  the  United  States.  The 
present  plan  for  regional  reserve  banks  contemplates 
that  the  rate  of  discount  will  vary  in  different  sec- 
tions of  the  country  at  the  same  time.  Such  variation 
of  rate  is  sound  banking. 

The  greatest  defect  of  our  present  system  is  that 
there  are  as  many  unrelated  and  distinct  reserve 
centers  as  there  are  banks.  The  most  important  tiling 
that  legislation  can  accomplish  is  to  relate  all  these 

7 


Officers  Letters. 


reserves  one  to  another  by  placing  the  reserves  in  a 
common  reservoir.  The  proposed  measure  fails  to  ac- 
complish this  effective  mobilization  because  it  creates 
a  considerable  number  of  reserve  centers  which  would 
compete  one  against  another  in  just  the  same  manner 
as  the  twenty  thousand  individual  banks  now  com- 
pete, but  the  competition  might  become  even  more 
fierce  and  dangerous  for  the  power  of  these  several 
regional  reserve  institutions  would  be  immeasurably 
greater  in  a  sectional  struggle  for  reserves  because 
their  strength  would  be  greater  than  is  the  strength 
of  the  existing  numerous  units. 

The  framers  of  the  bill  have  recognized  that 
danger,  and  for  that  reason,  and  perhaps  for  some 
other  disingenuous  reasons,  have  created  a  board  of 
control  which  is  given  sweeping  power  over  the  man- 
agement of  the  several  federal  reserve  banks.  It 
is  obvious  that  a  central  power  is  necessary  if  the 
reserves  are  to  be  effectively  mobilized.  There  must 
be  a  central  power  with  a  view  broader  than  the  ad- 
ministration of  each  of  the  regional  reserve  centers 
in  order  to  harmonize  and  synchronize  the  administra- 
tion of  those  reserve  centers.  In  a  word,  there  must, 
in  fact,  be  a  central  bank,  and  that  is  what  the  pro- 
posed measure  creates. 

The  fundamental  objection  to  the  plan  is  the 
character  of  the  control  which  is  provided.  The 
powers  that  are  granted  to  this  federal  reserve  board 
are  in  the  main,  but  with  some  exceptions,  such 
as  would  of  necessity  be  granted  to  the  Directors 
of  a  central  bank.  They  are  such  powers  as  are 
essential  to  the  complete  mobilization  of  reserves  and 
to  the  operation  of  the  other  necessary  functions  of 
a  central  bank.  It  is  well  frankly  to  recognize  that 
broad  powers  and  great  authority  are  necessary  to 
the  successful  operation  of  the  plan  and  that  those 
powers  must,  in  effect,  be  the  sort  of  powers  that 
would  be  granted  to  the  management  of  a  central 
bank.     No  matter  what  circumlocution  is  used,  we 


Oftlccrs   Letters. 


must  recognize  that  the  effective  mobilization  of  re- 
serves can  only  be  accomplished  through  what  is  sub- 
stantially a  central  bank,  and  that  the  proposed 
measure  is  in  effect  establishing  a  central  bank  with 
the  most  sweeping  authority  and  power  given  to  the 
board  of  control. 

The  objection  is  not  to  the  powers  granted  but 
to  the  hands  in  which  they  are  placed.  Nor  does 
that  objection  lie  solely  against  the  fact  that  the  pro- 
posed federal  reserve  board  is  political  in  its  char- 
acter, although  obviously  both  financial  and  political 
history,  as  well  as  the  operation  of  our  present-day 
commissions,  furnish  ample  illustration  of  the  danger, 
the  ineffectiveness,  the  inadequacy  of  a  politically 
appointed  board  for  a  responsibility  of  this  sort. 

The  objection,  however,  is  even  deeper.  If  the 
appointing  power  lay  with  the  banks  themselves  and 
the  detached  character  of  the  board  was  maintained, 
a  board  could  not  be  created  which  would  be  com- 
petent to  assume  the  responsibilities.  The  trouble 
lies  in  separating  the  management  of  a  financial  in- 
stitution from  its  ownership.  A  management  so 
separated,  no  matter  how  appointed,  could  not  re- 
main intelligently  in  touch  with  conditions  and  per- 
form the  vastly  important  and  extremely  complicated 
functions  that  are  entailed  under  this  plan,  and  which 
must  be  inherent  in  any  plan  which  will  successfully 
mobilize  the  banking  reserves  of  the  country.  We 
might  as  well  expect  legislators  not  responsible  to 
their  constituency  to  represent  wisely  the  interests 
of  their  constituency.  The  objection  may  be  made 
that  a  management  is  needed  that  will  represent  the 
interests  of  the  people  and  not  those  of  the  owners 
of  the  banks.  That  seems  to  me  a  misconception  both 
of  the  relation  of  the  owners  of  the  banks  to  their  in- 
vested capital  and  to  the  interests  of  the  whole  people. 
It  must  not  be  forgotten  that  the  men  who  control 
the  capital  invested  in  the  banking  business  can  and 
will  withdraw  that  capital  if  the  conditions  of  the 


Officers  Letters. 


business  do  not,  in  their  opinion,  warrant  the  con- 
tinuance of  the  investment.  It  should  be  recognized, 
too,  that  the  men  who  have  invested  money  in  the 
banking  business  are  intelligent  enough  to  know  that 
continued  success  in  banking  can  come  only  when 
accompanied  by  continued  prosperity  of  the  whole 
country.  The  interests  of  the  general  public  and  the 
interests  of  the  bank  owners  are  identical.  There 
cannot  be,  over  any  considerable  period,  prosperous 
banking  without  prosperous  business. 

The  conduct  of  this  central  bank  can  never  be  suc- 
cessful unless  the  men  who  have  the  powder,  the  author- 
it}^  and  the  responsibility,  are  in  close,  active,  working 
touch  with  the  every-day  problems,  conditions  and  at- 
mosphere of  the  financial  world.  If  such  a  board  as  is 
proposed  were  formed  by  appointing  the  seven  lead- 
ing bankers  of  the  United  States — whoever  they  may 
be — and  these  men  became  dissociated  from  the 
daily  conduct  of  actual  affairs  and  sat  in  Washing- 
ton, directing  at  arms'  length  the  operation  of  the 
several  reserve  banks,  they  would  very  rapidly  lose 
the  power  to  direct  wisely.  How  much  more  certain, 
then,  must  it  be  that  a  board  having  on  it  only  one 
man  of  technical  banking  experience,  and  subject  to 
all  the  vicissitudes  of  political  pressure  and  party 
trading  in  its  make-up,  will  fail  to  assume  success- 
fully these  responsibilities. 

Here  then  is  the  fundamental  weakness  of  the  pro- 
posed legislation,  and  it  is  so  fundamental  that  we 
may  better  have  no  legislation  at  all  than  to  have 
legislation  in  which  the  control  of  the  credit  system 
of  this  country  is  dissociated  from  the  active  re- 
sponsibility of  bank  management.  It  is  with  the 
deepest  regret  that  I  reach  this  conclusion,  for  I 
believe  I  see  as  clearly  as  anyone  the  profound  need 
for  legislation  and  the  tremendous  impetus  that  will 
be  given  our  commerce  and  industry  if  a  banking 
system  can  be  created  that  rests  on  correct  economic 
principles. 

10 


Officers  Letters. 


It  seems  to  me  that  the  only  proper  method  of 
control  must  be  through  a  board  composed  of  ex- 
perienced practical  bankers  in  direct  touch  with 
current  business,  who  are  selected  for  short  terms 
by  the  member  banks  and  who  are  responsible  to 
those  banks  in  the  same  way  that  the  executive  offi- 
cers of  a  national  bank  are  responsible  to  the  stock- 
holders. Tliere  may  well  be  a  Government  Board 
whose  sole  function  should  be  to  see  that  all  statutes 
are  obej^ed  by  the  management.  The  Board  that  has 
to  exercise  discretion  in  the  management  must  be  re- 
sponsible to  the  stockholders;  the  Board  that  exer- 
cises supervino7i,  should  be  composed  of  government 
officials,  but  their  sole  function  should  be  such  super- 
vision as  will  insure  the  most  scrupulous  observance 
of  the  statutes,  and  those  statutes  should  be  so  specific 
that  the  Board  charged  with  the  management  knows 
clearly  the  lines  within  which  it  may  exercise  dis- 
cretion. 

In  making  the  provisions  of  this  act  compulsory 
u])on  the  national  banks,  under  pain  of  the  forfeiture 
of  their  charter  life,  the  framers  of  the  measure  have 
clearly  recognized  that  banks  w^ould  not  freely  sub- 
ject themselves  to  the  regulations  imposed  even  in 
order  to  gain  the  tremendous  advantages  of  mobilized 
reserves  and  central  institutions  for  rediscount.  If 
the  measure  were  on  the  w'hole  one  that  would  be 
beneficial  to  existing  national  banks,  there  would  be 
no  need  for  compulsion,  but  I  have  heard  no  advocate 
of  it  express  the  opinion  that  it  w^ould  be  feasible 
to  pass  the  measure  and  leave  the  banks  a  choice  as  to 
their  course  of  action  in  joining  or  refraining  from 
joining  the  federal  reserve  banks.  This  seems  answer 
enough  to  the  question  of  whether  the  proposed 
measure  is  advantageous  to  individual  banks. 

Holding  the  views  that  I  do  in  regard  to  the 
fundamental  essential  of  control,  it  is  of  little  ad- 
vantage to  take  up  for  analysis  the  detail  features  of 
the  measure.    Many  of  them  I  believe  are  excellent, 

11 


Officers  Letters. 


and  under  proper  control  would  work  to  the  great 
advantage  of  every  citizen  of  this  country  and  to 
the  position  of  the  nation  in  international  affairs. 
Some  of  them,  I  think,  rest  on  misconception  and 
some  are  obviously  formulated  without  knowledge 
of  banking  practice.  With  proper  control  estab- 
lished, however,  I  believe  the  measure  could,  without 
great  difficulty,  be  made  to  conform  to  correct  eco- 
nomic principles  and  could  be  fitted  to  existing  bank- 
ing conditions. 

The  one  point  in  the  detail  of  the  bill  from  which 
I  w^ould  most  sharply  dissent  is  in  the  creation  of 
Federal  Treasury  notes  instead  of  bank  notes.  It 
seems  to  me  that  there  is  a  misconception  of  the  func- 
tion of  bank-note  currency  behind  this  idea  of  a 
new  issue  of  Federal  Treasury  notes,  a  misconcep- 
tion that  is  far  more  complete  than  was  the  miscon- 
ception of  the  functions  of  bank-note  currency  which 
gave  us  a  bond-secured  circulation  having  no  re- 
sponsive relation  to  commerce.  It  is  clearly  the  func- 
tion of  government  to  coin  money  and  to  super- 
vise the  issues  of  paper  representing  coined  money. 
In  doing  that  it  is  an  auditor.  It  does  not  create 
money  nor  influence  its  volume.  It  audits  the  cor- 
rectness of  coinage  as  to  weight  and  fineness,  return- 
ing as  much  gold  as  it  receives.  If  it  holds  coin  on 
deposit  it  audits  the  issue  of  paper  currency  which 
constitutes  merely  warehouse  receipts  for  coin  stored. 
In  addition  it  may  issue  fiat  money,  as  we  have  done 
with  our  greenbacks.  But  the  distinction  between 
money  should  be  kept  clear,  and  where  that  distinc- 
tion is  clearly  apprehended  it  seems  to  me,  it  be- 
comes plain  that  the  government's  function  is  to  audit 
the  issue  of  money  and  the  bank's  function  to  use  its 
credit  in  the  form  of  a  circulating  note  when  their 
customers  prefer  that  form  to  a  deposit  balance. 
While  I  believe  the  idea  of  such  a  Treasury  note 
issue  as  the  bill  proposes  is  an  economic  error, 
still  I  am  of  the  opinion  that  we  could  operate 
under  such  a  system  as  is  proposed  if  the  proper 

12 


Officers   Letters. 


authority  were  Icl't  free  to  exereise  its  judgment  iu 
regard  to  the  vohime.  The  proper  authority  is  tlie 
people.  No  bank  management  and  no  board  of  con- 
trol can  tell  how  much  currency  is  needed  at  any 
given  time  for  the  conduct  of  the  business  of  the 
country.  That  will  be  determined  if  the  people  are 
left  free  to  determine  it  with  just  the  same  accuracy 
that  the  nimiber  of  checks  afloat  is  determined.  Clear 
vision  as  to  the  function  of  currency,  as  distinct  from 
the  function  of  credit,  is  needed  in  order  to  appre- 
hend this  fact.  A  man  will  carry  no  more  currency 
in  his  pocket  than  he  needs  for  the  daily  conduct  of 
his  affairs.  If  there  be  a  surplus,  it  will  naturally 
find  its  way  into  banks.  If  it  has  no  reserve  value  and 
there  are  ample  redemption  facilities,  it  will  quickly 
find  its  way  back  to  its  source  of  issue  and  disappear. 
Complete  redemption  facilities  will  take  care  of  any 
danger  of  inflation,  and  the  amount  of  such  notes 
in  circulation  will  be  correctly  gauged  by  the  com- 
bined judgment  of  all  persons  in  the  country  who 
use  currency  if  there  is  freedom  of  issue  and  certainty 
of  easy  redemption. 

The  subject  of  the  redemption  of  bonds  now  held 
as  a  basis  for  bank-note  circulation  is  one  of  national 
honor  and  fair  play,  but  is  not  involved  in  the  essential 
economic  principles  that  must  underlie  sound  legisla- 
tion. It  would  be  unfair  to  cause  banks  to  lose 
money  because  they  have  been  forced  under  the  opera- 
tion of  existing  laws  to  invest  in  bonds  at  prices  far 
above  the  investment  value  of  the  bonds,  but  if  Con- 
gress chooses  to  pass  legislation  that  is  unfair  in  tliat 
respect  it  will  not  necessarily  interfere  with  the  opera- 
tion of  a  banking  measure  that  is  otherwise  correct. 

A  fairer  plan  woidd  be  to  immediately  refund  the 
two  per  cent,  bonds  into  three  per  cents,  allowing  the 
circulation  privilege  to  remain  with  them  as  at  present, 
but  add  one  per  cent,  to  the  tax  on  circulation, 
when  secured  by  these  refunded  bonds.  An 
added  value    wliieli    would  tend  to    maintain    them 


Officers  Letters. 


at  i)ar  would  thus  be  given  to  these  new  threes  which 
are  not  in  the  circulation  account  of  the  banks.  This 
arrangement  might  also  make  it  possible  for  national 
banks  to  go  out  of  the  system  if  they  so  desire  with- 
out facing  a  loss  on  the  bonds  they  would  withdraw 
from  their  circulation  account.  The  added  cost  to 
the  government  would  be  an  added  one  per  cent, 
interest  only  on  such  bonds  of  this  class  as  are  not 
included  in  the  circulation  account,  and  the  aggregate 
of  such  bonds  is  comparatively  small. 

Respectfully, 

F.  A.  Vanderlip. 
Julv,  1913. 


'A 


()  III  errs    Letters. 

July,  19i;j. 


c ; 


111  response  to  the  invitation  extended  to  bankers 
generally  for  eomiiients  and  expressions  of  their 
opinions  coneerning  the  provisions  of  the  bill  (S. 
'liV.M))  introduced  in  the  Senate  June  26th,  1913, 
and  referred  to  the  Committee  on  Banking  and  Cur- 
rency, providing  for  the  establishment  of  Federal 
reserve  banks,  and  for  other  purposes,  I  have  the 
honor  to  submit  herewith  for  the  consideration  of 
your  Committee  an  analysis  and  a  discussion  of  cer- 
tain important  features  and  sections  of  the  bill,  with 
suggestions  made  from  practical  banking  and  busi- 
ness points  of  view.  I  deem  it  unnecessary  to  add 
that  these  comments  and  suggestions  would  not  be 
worthy  of  your  consideration,  nor  would  they  be 
offered,  were  they  based  upon,  or  did  they  involve, 
local,  sectional  or  selfish  interests. 

Aside  from  an  acceptance,  at  the  outset,  of  the 
inherent  soundness  of  the  economic  principles  em- 
braced in  the  provisions  of  any  measure  proposed 
for  the  reconstruction  of  our  national  currency 
and  banking  systems,  in  order  that  a  plan  shall 
inspire  confidence  and  command  public  support, 
there  are  other  questions  first  to  be  considered  and 
agreed  upon.  These  questions  are,  of  course:  (1), 
an  exposition  of  the  principal  defects  in  our  existing 
system;  (2)  a  determination  beyond  all  doubt  as 
to  whether  a  proposed  plan  would  permanenth^  cure 
these  defects,  (3)  without  giving  rise  to  other  and 
perhaps  greater  evils  or  dangers. 

The  principal  defects  in  our  system  generally  are 
agreed  to  be: 

1.  (a)  The  decentralization  of  bank  reserves  and 
the  lack  of  means  for  their  mobilization,  (b)  To 
a  certain  but  less  dangerous  extent,  the  duplication 
or  "pyramiding"  of  bank  reserves. 

15 


Officers  Letters. 


These  defects  give  rise  to  a  condition  of  systemic 
incohesiveness,  involving  a  constant  struggle  among 
individual  banks  for  the  maintenance  of  their  legal 
reserves.  This,  of  course,  is  destructive  of  all  possi- 
bility of  common  support  or  of  mutual  cooperation 
between  banks  except  in  circumstances  necessitating 
the  suspension  of  currency  payments. 

2.  The  absence  of  a  discount  market  where  short- 
time,  self-liquidating  current  credits  growing  out  of 
trade  transactions  may  be  economically  utilized. 

3.  Bank-note  issues  based  upon  practically  a  fixed 
amount  of  Government  bonds  and  thereby  deprived 
of  the  essential  quality  of  flexibility. 

The  result  of  this  is  that  as  trade  naturally  rises 
and  falls  in  volume,  there  are  constantly  recurring 
periods  of  scarcity  of  currency  at  one  time  or  of  a 
redundancy  at  another.  Rarely  is  the  amount  of 
currency  in  circulation  at  any  time  exactly  balanced 
to  the  needs  of  trade.  Such  an  adjustment  takes 
place  only  during  brief  and  infrequent  intervals,  and 
merely  as  a  coincidence  when  passing  from  one  ab- 
normal condition  or  extreme  to  another. 

To  the  extent  that  any  plan  certainly  would  remedy 
these  defects  without  introducing  other  dangers,  it 
may  be  said  to  be  good  and  to  merit  support;  to  the 
extent  that  any  plan  certainly  would  fail  to  accom- 
plish these  benefits,  or  that  it  would  in  all  probability 
introduce  other  and  possibly  greater  evils,  such  plan 
may  be  said  to  be  bad  and  to  deserve  condemnation. 

Applying  these  tests  to  the  bill  under  considera- 
tion, it  may  be  said  that  with  modifications  of  a  few 
sections  which  involve  the  elementals  of  sound  cur- 
rency and  banking  legislation  the  plan  may  be  made, 
if  not  ideal,  certainly  practical  and  workable.  So 
modified  it  would  be  a  long  step  in  the  direction  of  a 
sound  and  unified  system  of  banks  whereimder  there 
would  be  supplied  a  true  bank-note  currency  of  auto- 
matic flexibility  and  of  adequate  volume.  The  points 
must  be  made  clear,  however,  that  the  modifications 

16 


Officers   Letters. 


suggested  are  essential  to  the  successful  conduct  of 
any  plan;  and  lliat  although  the  proposed  plan  does 
in  part  recognize  and  embody  certain  of  these  ele- 
mental principles  without  which  no  plan  would  be 
safe  or  sound,  at  the  same  time  the  recognition  ac- 
corded them  generally  is  narrow  or  limited.  Ap- 
parently the  recognition  is  granted  with  misgiv- 
ings or  distrust.  In  almost  every  case  where  these 
principles  are  involved  the  plan  might  be  strength- 
ened and  made  better  or  more  useful  by  their  uncon- 
ditional acceptance  and  their  broader  applications. 

To  clarify  the  meaning  of  the  foregoing  paragraph 
I  shall  particularize  a  few  instances: 

1.  The  plan  is  good  in  that  it  recognizes  the  ne- 
cessity for  the  mobilization  of  bank  reserves,  but  it 
is  not  so  strong  as  it  might  be  made  in  this  particu- 
lar, because  it  temporizes  with  the  imnciple  itself 
and  provides  for  not  less  than  twelve  Federal  reserve 
banks  (each  with  a  number  of  small  and  more  or 
less  weak  branches)  in  which  the  reserves  of  mem- 
ber banks  are  to  be  placed  and  held  and  thus  nec- 
essarily scattered,  instead  of  accepting  and  adopting 
the  whole  principle  at  once,  and  in  accordance  there- 
with establishing  one  strong,  impregnable  central 
bank  having  as  many  correspondingly  strong 
branches  as  may  be  required.  Under  the  plan  pro- 
posed, many  member  banks  no  doubt  will  be  stronger 
in  capitalization,  and  probably  also  in  resources,  than 
are  the  branches  with  which  such  banks  are  required 
to  do  business.  This  certainly  is  not  calculated  to 
inspire  confidence  nor  to  induce  the  larger  banks  to 
accept  memberships  with  attendant  risks  and  re- 
sponsibilities. 

2.  The  plan  is  good  in  that  it  provides  for  the 
establishment  of  a  discount  market;  but  it  is  weak 
in  confusing  short-time  commercial  assets  with  in- 
vestment securities  as  a  basis  for  note  issues.  It 
is  also  weak  in  granting  to  the  Federal  reserve  board 
the  discretionary  power  to  authorize  loans  against 

17 


Officers  Letters. 


investment  securities ;  and  also  in  granting  the  Board 
power  to  fix  minimum  discount  rates  for  Federal 
reserve  banks.  The  plan  is  good  in  that  it  seeks 
to  bind  together  the  several  Federal  reserve  banks 
under  one  central  control.  This  is  sound  and  abso- 
lutely necessary;  but  it  is  bad  in  placing  the  central 
control  absolutely  in  the  hands  of  political  appointees. 
The  necessity  for  a  central  head  is  recognized,  but 
the  fatal  mistake  is  made  that  that  head  shall  be 
a  political  body. 

3.  The  plan  is  good  in  that  it  grants  to  one 
Federal  reserve  bank  the  power  to  lend  to  another 
such  bank ;  but  it  is  unsound  and  dangerous  in  giving 
to  the  Federal  reserve  board  power  to  compel  a  Fed- 
eral reserve  bank  to  make  loans  to  another  such 
bank. 

4.  The  plan  is  good  in  the  general  provisions  which 
are  made  for  note  issues  by  Federal  reserve  banks 
against  short-time,  liquid  assets  supported  by  strong 
gold  reserves ;  but  it  is  weak,  if  not  actually  deceptive, 
in  certain  of  the  conditions  imposed  upon  the  issue 
of  the  notes,  and  in  failing  to  insure  their  prompt  and 
automatic  redemption. 

5.  The  plan  is  good  in  that  memberships  in  the 
Federal  reserve  banks  are  open  upon  equal  terms 
to  national  and  state  banks  alike.  But  it  condemns 
itself  and  betrays  a  lack  of  confidence  on  the  part  of 
its  proponents  in  that  membership  on  the  part  of 
national  banks  is  made  compulsory  and  a  condition 
of  their  remaining  in  the  national  banking  system.  It 
would  be  difficult  to  imagine  a  weaker  or  less  de- 
fensible position,  for  a  great  constructive  undertak- 
ing. 

Acknowledging  and  commending  the  strong  and 
desirable  features  of  the  })ill,  (but  before  going  into 
a  critical  analysis  of  its  details)  we  appear  now  to 
have  reached  a  point  where  upon  abstract  questions 
of  principle,  involving  not  more  than  two  or  three 
points,  upon  which  hinge  the  success  or  the  failure 

18 


Officers    Letters. 


of  the  whole  sclieine,  ^\'e  I'eel  that  we  may  take  broad 
issue  and  draw  clearly  the  lilies  of*  deniareation  be- 
tween the  soundness  and  the  unsoundness  of  the  bill 
itself,  and  between  the  questions  of  approval  or  of 
disapproval. 

These  vital  points  are: 

I.  (1)  The  political  character  of  the  entire  mem- 
bership of  the  board  of  control.  (2)  The  unlimited 
and  uncontrolled  powers  of  this  board  in  respect  of 
their  own  discretionary  acts,  over  the  management 
of  the  Federal  reserve  banks  and  of  the  conditions  of 
note  issues.  (S)  The  dangerous  nature  of  certain 
of  these  powers.  (4)  The  possible  abuse  and,  at 
times,  certainly  unwise  use  of  these  powers  when 
placed  in  inexperienced  hands  or  when  used  by 
politicians  under  stress  of  party  pressure,  or  for  party 
advantage. 

II.  (1)  The  character  of  the  organization  and 
management  of  the  Federal  reserve  banks.  (2)  The 
domination  by  the  Federal  Reserve  Board  of  the 
boards  of  directors  of  Federal  reserve  banks,  (a) 
through  their  appointments  of  three  members  (Class 
"C")  out  of  each  board  of  nine  directors,  one  of 
which  class  in  each  case  shall  be  chairman  of  the 
board  of  directors  and  be  designated  as  "Federal 
Reserve  Agent."  The  salary  of  this  agent  is  fixed 
by  the  Federal  reserve  board.  He  is  their  direct 
representative  and  agent  and  is  removable  at  their 
pleasure  without  notice;  (b)  through  their  power  to 
remove  three  members  elected  by  the  banks  (Class 
"B").  (3)  The  resulting  minority  representation 
of  stockholders  on  the  boards  of  Federal  reserve 
banks.  That  is  to  say,  the  Federal  reserve  board 
has  the  appointing  power  of  three  members  (includ- 
ing the  chairman)  of  the  board  of  each  Federal  re- 
serve bank,  and  the  power  to  remove  three  other 
members;  thus  giving  the  Federal  reserve  board 
control  of  the  directorate  of  each  Federal  reserve 

19 


Officers  Letters. 


bank,  and  thereby  insuring  the  political  character  of 
each  such  board. 

III.  (1)  The  control  by  the  Government 
through  a  political  board  of  all  bank-note*  issues, 
including  the  power  at  the  discretion  of  the  board 
to  charge  interest  for  the  use  of  such  notes  at  a 
rate  to  be  fixed  by  the  Board.  (2)  The  "purport- 
ing" that  such  notes  are  obligations  of  the  Govern- 
ment, when  in  fact  they  are  obligations  of  the  Federal 
reserve  banks  and  are  secured  directly  by  segregated, 
selected  assets,  and  are  secured  also  by  a  general 
prior  lien  on  all  assets  of  the  Federal  reserve  bank 
which  issues  them  and  supported  by  a  specific  gold 
reserve  carried  by  that  particular  bank.  Incidentally 
only  is  the  Government  a  redemption  agent  for  the 
bank,  and  for  this  purpose  it  carries  a  5%  redemption 
fund  deposited  by  the  bank  issuing  the  notes.  (3) 
The  Government  being  merely  a  guarantor  and 
standing  (as  it  does  in  the  case  of  existing  national 
bank  notes)  merely  as  a  redemption  agent  of  the 
bank  of  issue,  it  is  not  clear  what  good  reason  exists 
for  a  deception  of  the  public  by  a  false  "purport" 
on  the  face  of  the  bank  notes. 

Considering  the  points  here  raised,  the  following 
questions  seem  clearly  defined.  Shall  the  control 
and  domination  of  the  banking  business  of  the  United 
States,  including  note  issues,  bank  credits  and  the 
cash  reserves  of  the  banks,  be  surrendered  uncon- 
ditionally into  the  hands  of  a  board  of  seven  mem- 
bers a])pointed  by  the  President,  the  authority  of 
which  board  is  supreme  and  whose  acts  are  subject 
to  no  review  or  appeal?  Is  there  any  reason  why 
such  control  of  the  banking  business  should  be  placed 
in  the  hands  of  any  politically  appointed  group  of 
men?  Is  there  wisdom  or  safety  in  placing  such 
power  in  the  hands  of  a  board  of  seven  individuals 
having  no  personal  interest  in  the  banks  or  in  their 
safe  conduct?  By  reason  of  a  lack  of  personal  in- 
terest in  the  banks  on  the  part  of  the  members  of 
the  Federal  reserve  board  and  of  their  failure  to  rep- 

20 


Officers  Letters. 


resent,  directly  or  indirectly,  the  stockholders  of  the 
banks,  is  it  not  reasonable  to  suppose  that  their  official 
acts  might  be  influenced  by  personal  or  political  con- 
siderations? Is  it  conceivable  that  the  officers,  di- 
rectors or  stockholders  of  any  individual  bank, 
whether  national  or  state,  v^^ould  voluntarily  assent 
to  such  a  proposal  on  its  behalf  alone;  and  if  not, 
why  should  such  banks  assent  to  it  collectively?  Why 
should  not  the  banks  which  are  required  to  contribute 
all  the  capital  of  the  Federal  reserve  banks  and  to 
assume  all  the  risks  of  the  conduct  of  their  business 
be  given  a  voice  in  the  board  of  control,  and  if 
not,  why  not?  Shall  the  national  banks  be  com- 
pelled, and  will  the  state  banks  voluntarily  propose, 
to  become  members  of  Federal  reserve  banks,  con- 
tributing their  capital  and  placing  the  whole  or  a 
greater  part  of  their  cash  reserves  absolutely  and 
unconditionally  under  the  control  of  any  political 
board?  Would  any  bank  alone  do  this;  or  in  the 
case  of  share-holders  would  they  consent  to  do  so 
with  their  own  private  fortunes  ?  Would  any  private 
corporation  or  individual  do  so,  and  if  not  why  should 
the  banks  collectively  be  called  upon  or  compelled 
to  do  so? 

These  questions  are  suggestive  of  others  which 
might  be  asked  along  the  same  lines,  but  they  answer 
themselves  so  definitely  that  no  arguments  seem  nec- 
essary. It  does  not  seem  possible  to  conceive  of 
any  reason  not  grounded  in  political  designs  or  based 
upon  political  prejudices  why  such  provisions  of  a 
banking  and  currency  bill  should  be  presented  and 
made  compulsory  upon  the  banks.  It  would  seem 
absolutely  necessary  that  these  and  similar  political 
features  must  be  modified  and  brought  into  harmony 
with  the  practices  and  customs  of  sound  business 
enterprises  or  the  whole  plan  might  better  be  aban- 
doned. 

If  there  be  any  who  honestly  believe  that  there  arc 
two  sides  to  the  question  as  to  whether  a  politically 

21 


Officers  Letters. 


controlled  bank  can  be  kept  permanently  out  of  poli- 
tics, they  need  go  no  further  than  to  review  the  histor- 
ies of  the  first  and  second  Bank  of  the  United  States. 
The  questions  of  note  issues  and  of  Governmental 
control  of  note-issuing  banks  are  not  new  ones.  Con- 
gress has  struggled  with  these  questions  unsuccess- 
fullj^  and  nearly  hopelessly,  for  more  than  one  hun- 
dred and  twenty  years.  The  problem  is  still  Avith 
us  in  all  its  phases.  It  is  involved  to-day  in  the 
identical  political  complications  which  beset  it  during 
the  heated  debates  (which  were  twenty-five  years 
apart)  preceding  the  establishment  of  the  first  and 
second  Bank  of  the  United  States. 

Aside  from  the  question  of  constitutionality  which 
was  hotly  debated  before  the  establishment  of  the 
first  bank  but  which  was  not  affirmatively  settled 
until  shortly  before  the  end  of  the  existence  of  the 
second  bank,  the  political  antagonisms  were  then  such 
as  to  lead  to  charges  that  the  bank  would  be  the 
creature  of  what  was  even  then  called  "The  Money 
Power,"  that  it  would  benefit  only  the  wealthy  classes, 
and  that  it  could  not  serve  alike  and  impartially  the 
interests  of  the  seaboard  and  those  of  the  interior. 
History  is  here  repeating  itself.  There  existed  then 
the  same  confusion  of  thought  and  the  same  preju- 
dice in  respect  of  the  banking  business,  the  same  di- 
versity of  opinions  and  conflicts  of  political  interests 
which  we  find  to-day.  All  the  turmoil  and  scheming 
centered  then,  as  they  do  now,  largely  about  the 
questions  of  Governmental  control  and  the  issue  of 
notes.  In  these  respects  we  do  not  appear  to  have 
made  any  progress,  nor  does  it  seem  that  a  century 
and  more  of  bitter  and  costly  experience  by  the 
people,  for  want  of  a  sound  banking  and  currency 
system  have  taught  our  statesmen  a  way  out  of  the 
councils  of  darkness. 

The  fact  that  both  the  first  and  second  Bank  of 
the  United  States  were  established  after  heated  and 
protracted  political  debates  would  make  it  but  natural 

22 


Olllccrs  Letters. 


iliiit  opposition  should  have  survived  and  continued, 
and  that  both  banks  should  eventually  have  become 
stoiin  centers  of  strife  and  ended  by  being  engulfed 
in  political  vortices.  In  the  light  of  history  can  any 
doubt  remain  that  if  this,  the  third  Bank  of  the  United 
States,  wliich  is  now  proposed  shall  be  established 
under  political  control  and  after  a  period  of  heated 
debate,  that  it  can  long  remain  free  from  political 
cntanQ-lements;  or  that  when  it  shall  become  the  center 
of  ])olitical  strife,  as  it  inevitably  must,  that  its  fate 
will  be  different  from  that  of  its  predecessors? 
It  will  matter  little  whether  the  affairs  of  the 
bank  shall  be  sound  or  not,  if  it  shall  be  launched 
now  as  the  creature  of  any  party  and  placed  under 
party  control.  Charges  of  corruption  and  of  the 
abuse  of  power  will  be  made  and  the  end  must  in- 
evitably be  the  same.  Since  the  quality  of  our  states- 
manship has  remained  imchanged  through  more  than 
a  century,  what  reason  is  there  to  believe  that  of  a 
sudden  the  character  of  a  j^olitically  appointed  board 
of  control  shall  become  different  or  better,  and  less 
amenable  to  political  influences  than  similar  bodies 
have  been  in  the  past?  In  the  very  framing  of  this  bill, 
the  fact  is  everywhere  apparent  that  however  meri- 
torious any  plan  might  be  made,  it  could  not  be 
divorced  from  tlie  influences  of  politics.  This  one 
has  not  been. 

I^et  it  not  be  understood  that  this  protest  against 
the  unwise  proposal  to  concentrate  the  regulation  and 
control  of  credits,  and  of  the  business  of  ])anking 
in  the  United  States,  in  the  hands  of  a  few  politicians 
implies  any  unwillingness  on  the  part  of  the  bankers 
to  accord  the  Government  a  large  voice  in  the  afl^airs 
of  the  reserve  banks.  If  such  representation  be  non- 
partisan, it  not  only  will  be  welcome  but  is  desired. 
Bankers  and  the  business  public  would  cheerfully 
concede  that  the  representation  of  the  Government 
should  go  so  far  as  to  be  dominant  in  respect  of  all 
matters  relating  to  the  banks,  which  properly  are 
the  subjects  of  Governmental  regulation  and  control: 

23 


Oiticers  Letters. 


such,  for  example,  as  the  powers  now  exercised  by  the 
officers  of  the  Government  in  respect  of  national 
banks  in  determining  their  soundness  and  the  lawfid 
conduct  of  their  business. 

But,  in  respect  of  the  managerial  functions  in- 
volving discretionary  acts  which  require  in  all  such 
cases  the  exercise  of  knowledge  based  upon  practical 
experience  in  the  business  of  banking,  the  protest  is 
repeated  and  emphasized  that  such  powers  cannot 
in  safety  be  entrusted  to  inexperienced  or  incom- 
petent hands.  To  do  so  is  not  only  to  invite  disaster, 
but  to  insure  it. 

In  view  of  these  representations  the  following  sug- 
gestion is  respectfully  offered:  Why  not  have  the 
Federal  Reserve  Board  composed  of  two  coordinate 
branches,  working  together,  but  acting  independently 
within  their  respective  spheres,  much  as  do  separate 
committees  on  ordinary  boards  of  directors  ?  ( 1 )  The 
Supervisory  or  Government  branch  to  consist,  let 
us  say,  of  six  members,  all  ex  officio,  and  to  be, 
respectively,  the  Secretary  of  the  Treasury,  the  Sec- 
retary of  Agriculture,  the  Comptroller  of  the  Cur- 
rency, the  Treasurer  of  the  United  States,  and  the 
respective  Chairmen  of  the  Committees  on  Banking 
and  Currency  of  the  Senate  and  the  House  of  Rep- 
resentatives. The  duties  and  powers  of  this  branch 
should  not  be  discretionary.  They  should  be  fixed 
by  statute  and  be  sufficiently  broad  and  ample  to 
compel  the  conduct  of  the  Federal  Reserve  Banks 
according  to  law.  (2)  The  Administrative  or  Busi- 
ness branch  to  consist  of  five  members,  all  to  be  ex- 
perienced bankers  elected  by  the  Boards  of  Directors 
of  the  several  regional  banks,  not  more  than  one  mem- 
ber to  be  chosen  from  any  district,  and  from  their 
numbers  to  be  selected  the  governor,  the  vice-gov- 
ernor and  other  officers  of  the  federal  board  of  con- 
trol. The  duties  and  powers  of  this  branch  should 
be  purely  administrative,  and,  broadly,  should  em- 
brace all  the  discretionary  and  executive  powers  now 
sought  to  be  placed  in  inexperienced  hands.    Certain 

24 


officers   Letters. 


general  powers,  such  for  examples  as  the  appoint- 
ments of  federal  reserve  agents,  the  appointments 
of  directors  of  "Class  C"  of  federal  reserve  banks, 
questions  relating  to  the  establishment  of  branches, 
etc.  might  properly  be  made  joint  and  rest  in  the 
whole  board,  of  which  the  Secretary  of  the  Treasury 
should  be  Chairman. 

This  would  seem  to  leave  the  Government  in  com- 
plete SUPERVISORY  CONTROL  of  the  banks,  with  ample 
power  to  compel  observance  of  the  law,  and  at  the 
same  time  would  place  the  business  administration 
of  the  affairs  of  the  regional  banks  in  experienced 
hands.  And,  moreover,  such  an  arrangement  would 
take  the  banks  entirely  out  of  politics. 

In  this  manner  the  Executive  Department  of  the 
Government  and  Congress  itself  through  the  Chair- 
men of  the  Committees  on  Banking  and  Currency 
would  be  always  fully  aware  of  the  condition  of  the 
banks,  and  would  be  assured  of  their  proper  and 
lawful  conduct;  w^iile  the  financial  responsibility  for 
the  conduct  of  the  business  affairs  of  the  banks  would 
rest  wiiere  it  properly  belongs,  in  the  hands  of  chosen 
representatives  of  the  shareholders. 

The  ex  officio  officers  should,  of  course,  receive  no 
additional  salaries,  with  the  possible  exception  of  the 
Comptroller  of  the  Currency;  while  the  salaries  of 
the  members  of  the  administrative  branch  might  be 
fixed  either  by  the  whole  board  or  by  the  votes  of 
the  directors  of  the  regional  banks,  or  in  any  other 
equitable  manner  so  as  to  make  certain  of  the  services 
of  experienced  men. 

That  tlie  time  is  ripe  and  the  need  pressing  for 
the  establishment  of  a  third  Bank  of  the  United 
States,  whether  it  be  in  the  form  of  one  great  central 
bank  or  of  a  dozen  regional  banks  under  central  con- 
trol, there  is  no  reasonable  doubt.  But  that  the  af- 
fairs of  such  a  bank,  or  banks,  should  be  beyond 
the  reach  of  politicians  and  without  the  bounds  of 
political  intrigues,  ambitions  or  entanglements,  there 
can  be  no  question  whatever. 

25 


Officers  Letters. 


"The  modern  facilities  for  communication  and  trans- 
portation and  the  rapidity  with  which  commercial 
transactions  are  consummated  have  caused  the  vol- 
ume of  trade  to  increase  by  leaps  and  bounds,  and 
have  thrown  upon  credit  all  over  the  world  a  con- 
stantly increasing  strain.  Periods  of  acute  financial 
stress  are  becoming,  therefore,  more  frequent  and 
more  or  less  chronic,  resulting  occasionally  in  crises 
which  may  be  resolved  only  by  greater  and  greater 
losses  and  disasters  unless  we  shall  reorganize  our 
monetary  and  banking  systems  and  adapt  them  scien- 
tifically to  our  needs.  The  accomplishment  of  so 
great  an  undertaking  requires  a  combination  of  the 
scientific  knowledge  of  economists  with  the  practical 
knowledge  of  experienced  bankers,  supported  by  con- 
structive non-partisan  statesmanship  of  the  highest 
order.  It  is  a  discouraging  commentary  upon  the 
practical  common  sense  of  our  people  and  upon  our 
acknowledged  capacity  for  solving  business  problems, 
that  we  have  been  unable  thus  far  to  rally  this  nec- 
essary combination  of  elements  in  support  of  sound 
and  permanent  banking  and  ciu'rency  legislation.  The 
present  seems  the  opportunity  of  a  century.  The 
people  need,  desire  and  expect  such  legislation.  They 
intend  to  have  it.  The  party  Avhich  possesses  the 
courage  and  statesmanship  to  rise  above  the  petty 
advantages  of  ephemeral  political  expediency  and 
give  the  people  a  soimd  measure  free  from  political 
prejudices  will  merit  the  confidence  and  will  receive 
the  support  and  gratitude  of  the  people. 


Very  respectfully, 

Joseph  T.  Talbert. 


26 


Officers    Letters. 


July,  1913. 
Sir: 

For  thirteen  years  I  served  as  an  offieer  of  a  coun- 
try bank.  Later  1  became  an  active  officer  of  an  in- 
terior reserve  city  bank  and  am  now  a  Vice-President 
of  The  National  City  Bank  of  New  York.  It  has  been 
in  the  line  of  my  duty  constantly  to  meet  country 
bankers.  As  President  of  the  Texas  State  Bankers 
Association  I  have  come  to  know  most  of  the  bankers 
of  that  state  and  have  supplemented  that  acquaintance 
by  meeting  a  large  number  of  those  outside  of  Texas 
and  throughout  the  southwest.  I  have  had,  I  believe, 
an  exceptional  opportunity  to  get  in  touch  with  the 
sentiment  of  country  bankers  with  regard  to  financial 
legislation.  I  have  condensed  the  opinions  of  correspon- 
dent banks  in  the  smaller  towns  and  cities  throughout 
the  United  States,  gathered  by  personal  interviews, 
by  correspondence  and  otherwise,  respecting  the 
pending  currency  bill,  and  the  following  reflects  their 
attitude  towards  it. 

They  disapprove  the  political  features  of  thc^  bill 
and  unite  in  saying  that  in  considering  the  relations 
between  country  national  banks  and  the  proposed 
Federal  banks  accoimt  should  be  taken  of  the  pecu- 
liar chai'acter  of  the  services  performed  generally  by 
those  banks  for  their  clients.  The  facilities  extended 
the  public  by  what  are  usually  termed  "country 
banks"  are  for  the  most  part  seasonal  and  usually 
consist  of  loans,  made  to  farmers,  matiwing  shortlj'' 
after  the  estimated  time  for  harvesting  their  crops: 
and  of  advances  to  cattle-men  and  live-stock  raisers 
maturing  at  times  when  young  stock  usually  is  sold 
or  when  fattened  cattle  are  sent  to  the  markets;  and 
of  loans  made  to  merchants  and  dealers  who  ordin- 
arily extend  mercantile  credits  to  farmers,  cattle-men 
and  others.  Debtors  of  all  these  classes  naturally 
prefer  that  their  obligations  should  be  made  to  ma- 
ture at  dates  when  their  collections  normally  should 
be  made  in  sufficient  amounts  to  enable  them  prompt- 
ly to  retire  their  notes  as  they  fall  due.  This  con- 
dition applies  more  particularly  to  the  debtors  of 

27 


Ofhcers  Letters. 


ba^ks  in  the  South,  Southwest,  West  and  Northwest. 
Such  are  the  seasonal  demands  for  funds  in  those  re- 
gions that  in  the  most  prosperous  districts  the  local 
banks  have  on  hand  idle  money  only  for  a  compara- 
tively brief  season  in  each  year.  Necessarily,  these 
banks  are  not  large  or  frequent  buyers  of  what  is 
termed  "commercial  paper,"  because  they  find  it  to 
their  interest  to  maintain,  when  they  have  idle  funds, 
liberal  balances  with  correspondent  banks  in  the 
larger  cities  in  order  that  they  may  create  there  a 
substantial  and  dependable  basis  for  credit  to  be 
available  during  four  or  five  months  of  the  year  when 
it  is  necessary  for  the  accommodation  of  their  cus- 
tomers and  properly  to  serve  their  communities  with 
banking  credits. 

Those  who  have  had  experience  in  managing  the 
affairs  of  country  banks  know  that  farmers,  live- 
stock raisers,  country  merchants  and  small  dealers  are 
slow  to  execute  notes  maturing  at  times  when  they 
know  it  will  entail  the  greatest  inconvenience  and 
often  a  serious  sacrifice  to  retire  the  paper.  In  con- 
sequence, they  generally  insist  upon  having  their  notes 
made  to  mature  not  less  than  fifteen  or  twenty  days 
after  the  date  when  they  expect  to  have  funds  in 
hand  to  meet  their  obligations.  Such  borrowers  may 
occasionally  be  slow  but  they  are  conservative  and 
are  good. 

Assuming  that  the  Federal  reserve  board  would 
classify  paper  of  the  character  here  described  as  eligi- 
ble for  rediscount  at  Federal  reserve  banks,  and 
which  would  probably  be  the  case,  it  may  readily  be 
seen  that  not  many  country  banks,  especially  those  in 
the  sections  named,  would  have  sufficient  amounts  of 
eligible  paper  on  hand  (maturing  within  the  time 
required  under  the  provisions  of  the  bill)  in  the 
natural  course  of  business  to  permit  them  to  place 
full  dependence  upon  the  Federal  reserve  bank  of 
their  district  for  their  rediscount  requirements.  This 
need  arises  ordinarily  from  three  to  five  months  in 
advance  of  the  maturity  of  the  great  portion  of  the 

28 


Officers  Letters. 


paper  held  by  countrj''  banks.  It  might  be  contended 
that  member  banks  should  arrange  *with  customers  so 
as  to  fix  their  maturing  notes  at  earlier  periods, 
granting,  if  necessary,  promises  of  renewal,  and  thus 
provide  sufficient  amounts  of  paper  rediscountable  at 
Federal  reserve  banks  for  their  seasonal  needs.  If 
the  dealings  of  such  classes  of  customers  were  con- 
fined to  national  banks  alone,  this  contention  might 
have  some  weight,  but  borrowers  having  the  knowl- 
edge that  they  can  secure  their  needed  advances  from 
competing  state  banks  upon  maturities  which  they 
could  reasonably  expect  to  meet,  it  is  not  probable 
that  they  would  be  willing  to  execute  notes  to  national 
banks  maturing  at  dates  which  they  know  in  advance 
would  be  inconvenient,  if  not  impossible,  to  meet, 
thereby  placing  themselves  at  the  mercy  of  national 
banks  if  payment  should  be  demanded  and  promised 
renewals  not  granted. 

Experienced  country  bankers  know  how  difficult  it 
is  to  induce  their  customers  of  the  classes  named  to 
execute  notes  of  maturities  which  are  not  acceptable 
to  the  borrower,  and  it  might  as  well  be  understood 
that  so  long  as  such  advances  can  be,  and  are  obtain- 
able from  competing  state  banks  on  the  customary 
and  convenient  maturities,  notes  for  other  and  shorter 
maturities  would  not  be  given  to  national  banks. 

Based  upon  these  considerations,  the  custom  of 
years  has  led  the  country  banks  to  place  dependence 
upon  their  reserve  agents  for  seasonal  accommoda- 
tions, and  these  in  view  of  the  good  average  balances 
maintained  by  good  banks  with  their  correspondents 
are,  as  a  rule,  usually  obtained  without  question  and 
without  the  formality  which  would  be  experienced  in 
offering  paper  for  rediscount  at  Federal  reserve 
banks,  especially  where  the  paper  offered  for  discount 
necessarily  must  meet  technical  statutory  require- 
ments. 

Under  the  proposed  law  the  reserve  requirements" 
would  make  it  difficult  for  country  national  banks  to 
remain  in  the  system  and  at  the  same  time  to  main- 

29 


Officers  Letters. 


tain  sufficient  balances  with  their  reserve  agents  to 
entitle  them  to  receive  the  advancement  of  their  cus- 
tomary borrowing  requirements  against  such  paper 
as  they  had.  If  they  did  maintain  such  balances,  it 
would  necessarily  reduce  to  a  considerable  degree  the 
earning  capacity  of  the  country  banks  because  it 
would  necessitate  a  curtailment  of  their  loans  in  order 
to  maintain  such  balances.  This  would  be  a  source  of 
dissatisfaction  to  stockholders  by  reason  of  decreased 
earnings,  and  at  the  same  time  it  would  be  a  disad- 
vantage to  the  banks  themselves  because  they  would 
not  be  in  a  position  to  perform  their  duties  in  loaning 
adequately  to  their  customers. 

These  reasons  alone  would  be  sufficient  to  cause 
countrj^  banks  to  give  serious  consideration  to  the 
question  of  taking  out  state  charters,  under  which 
they  would  enjoy  all  the  A^aluable  privileges  they  now 
have  as  national  banks,  and  would  still  be  left  on  a 
basis  of  equality  with  their  competitors.  That  is  to 
say,  the  proposed  law  holds  out  unsufficient  induce- 
ments to  small  country  banks  to  remain  in  the  system. 

There  is  a  source  of  considerable  profit  now  en- 
joyed by  country  banks  which  under  the  new  system 
would  be  partly,  if  not  entirely,  cut  off.  That  is  the 
exchange  charges  which  they  have  customarily  made 
in  remitting  to  their  correspondent  banks  for  items 
received  from  them  for  collection.  These  exchange 
charges  frequently  amount  to  sums  sufficient  in 
the  aggregate  to  cover  a  not  inconsiderable  portion 
of  the  annual  expenses  of  country  banks.  This  source 
of  revenue  will  not  be  given  up  without  much  protest 
and  opposition.  It  is  not  the  cit}^  bank,  but  the  coun- 
try bank,  which  lias  derived  a  profit  from  these 
charges  heretofore.  Tliis  ])rofit  has  been  two-fold: 
First,  the  benefit  derived  from  the  deposits  while  the 
customers'  checks  were  afloat,  and.  Second,  from  the 
exchange  charged  when  the  checks  were  presented  for 
collection  and  remittance. 

Country  bankers  as  a  rule  have  not  given  careful 
thought  to  all  tlic  details  of  the  proposed  bill,  but 

30 


OfTiccrs   Letters. 


those  who  have  done  so  and  are  alive  to  the  question 
are  so  far  as  I  have  come  in  contact  with  them  n earl 3^ 
unanimously  of  the  opinion  that  they  would  prefer  a 
bill  providing  ample  rediscount  privileges  available 
to  their  reserve  agents  in  the  larger  cities,  thus  insur- 
ing to  the  small  banks,  through  their  reserve  agents 
no  matter  what  the  financial  conditions  might  be,  a 
certain  dependable  source  of  borrowing  in  the  ])ro- 
portion  to  wliich  their  balances  might  entitle  them, 
without  on  the  part  of  the  country  bank  reference  to 
legal  technicalities  and  restrictions  and  without  pub- 
licity in  respect  of  their  borrowings. 

Should  the  bill  be  passed  as  proposed,  many  coun- 
try national  banks  will  be  obliged  for  competitive 
reasons  to  convert  into  state  banks  and  many  will 
do  so  by  choice.  In  these  circumstances  it  would  be 
well  to  amend  the  bill  so  tliat  national  banks  would 
be  permitted  to  subscribe  to  the  capital  stock  of  their 
Federal  reserve  banks  for  their  respective  districts, 
but  leaving  membership  in  every  case  optional  and 
not  compulsory. 

It  is  certain  that  few  country  national  banks  would 
view  with  favor  tlie  investment  of  10%  of  their  capi- 
tal, with  a  possible  additional  call  of  10%,  in  a  Fed- 
eral reserve  bank,  from  which  investment  they  could 
expect  to  receive  not  more  than  five  per  cent,  returns 
per  annum,  as  well  as  necessitating  the  tying  up  of 
a  considerable  portion  of  their  reserve  funds  with  no 
substantial  ])enefits  in  return  not  already  enjoyed  at 
the  hands  of  their  city  correspondents.  It  is  not  prob- 
able that  country  state  banks  in  considerable  numbers 
would  desire  to  become  members  of  the  Federal  re- 
serve banks  so  long  as  they  have  the  assurance  that 
their  borrowing  needs  would  be  cared  for  by  their  city 
corraspondcnts,  because  they  already  have  and  enjov 
considerable  advantaires  over  national  bank  competi- 
tors in  various  wavs.  Therefore,  on  the  whole  the  bill 
offers  nothing  attractive  to  country  state  banks. 

The  provisions  of  Section  27  of  the  bill  authoriz- 
ing country  national  banks  to  make  loans  against 

31 


Ofiicers  Letters. 


improved  and  unencumbered  farm  lands  to  the  ex- 
tent of  50%  of  their  values,  for  a  period  not  exceed- 
ing nine  months,  would  be  of  advantage  to  them  in 
but  one  way,  and  that  is  to  permit  a  farmer  to  mort- 
gage his  land  to  secure  his  current  yearly  borrowing 
needs.  Farm  loans  are  usually  sought  and  obtained 
upon  a  basis  of  from  three  to  five  years'  time,  with 
permission  to  pay  all  or  any  portion  of  the  principal 
at  any  annual  interest  date.  Therefore,  the  provi- 
sions of  the  bill  in  respect  of  farm  loans  would  be  of 
no  particular  benefit  to  the  farming  community  or 
to  country  banks.  There  are  few  substantial  farmers 
owning  imencumbered  lands  subject  to  mortgage  who 
cannot  obtain  all  their  seasonal  requirements  from 
local  banks  upon  their  plain  notes  of  hand  without 
mortgages  or  other  security.  Taking  it  all  in  all, 
it  cannot  be  said  that  the  provisions  of  the  new  bill 
requiring  country  national  banks  to  become  members 
of  the  system,  or  permitting  state  banks  to  do  so,  will 
when  fully  understood  appeal  favorably  to  them.  The 
advantages  appear  to  be  in  the  opposite  direction. 

The  small,  independent,  country  bank  fortified  by 
its  citj"  bank  connections  is  the  bone  and  sinew  of  our 
system  of  banking,  so  far  as  the  country  is  concerned. 
It  is  essential  to  the  welfare  of  the  National  banking 
system  that  these  units  should  remain  members  of 
the  system.  In  the  opinion  of  country  bankers,  there 
appears  to  be  no  question  that  if  the  small  country 
national  banks  were  not  required  to  take  stock  in  the 
proposed  Federal  reserve  banks  for  their  districts, 
but  were  permitted  to  remain  in  the  system  without 
hampering  their  present  relations  with  reserve  agents 
and  with  their  local  customers,  and  the  proposed  law 
was  so  amended  as  to  make  it  attractive  and  desirable 
to  banks  in  reserve  cities  to  lend  their  support  to  the 
plan,  the  option  being  given  the  country  national 
banks  to  be,  or  not  to  be,  members  of  the  Federal  re- 
serve banks,  as  they  chose,  equally  as  good  if  not 
much  better  results  would  be  obtained,  while  the  re- 
quirements of  the  country  banks  would  be  served 
more  to  their  advantage  and  to  their  satisfaction. 

32 


Otliccrs  Letters. 


Country  l)anks,  wliich  as  a  rule  are  conservative, 
will  not  look  with  favor  upon  the  proposed  appoint- 
ment of  the  three  directors  of  "Class  C,"  none  of 
whom  need  be  experienced  hankers  nor  even  residents 
in  the  district,  and  one  of  whom  shall  serve  as  chair- 
man of  the  board  of  directors  of  the  Federal  bank  of 
that  district. 

Country  banks  do  not  approve  and  wall  not  support 
a  political  board  having  control  over  the  banking 
business  of  the  colmtr3^  They  express  an  unwilling- 
ness to  submit  their  own  affairs  to  such  control,  and 
for  the  most  part  they  will,  I  believe,  decline  to 
accept  it. 


Respectfully, 


H.  R.  Eldridge. 


iZ 


GENERAL  DISCUSSION 

Analysis  of  Special  Provisions  of  the  Bill 

The  most  important  features  of  the  bill  and  those 
which  are  so  extraordinary,  radical  and  sweeping  in 
their  character  as  to  provide  for  a  revolution  in  the 
banking  business  of  this  country  relate  to  the  creation 
of  the  Federal  Reserve  Board,  the  vast  powers  con- 
ferred upon  it,  its  political  composition,  and  the 
power  of  the  Board  to  regulate  and  control  bank 
credits  and  note  issues.  In  view^  of  these  extraordi- 
nary powers,  it  seems  still  more  remarkable  that  there 
should  be  no  provisions  for  an  appeal  by  the  reserve 
banks  from  the  decisions,  acts  or  rulings  of  the  Board, 
nor  any  accountability  to  which  the  Board  or  its 
members  may  be  held,  nor  any  penalties  to  which  they 
may  be  subjected,  nor,  indeed,  any  authority  to  which 
they  shall  be  required  even  to  make  reports.  The 
sole  authority  in  restraint  of  their  acts  would  seem 
to  lie  in  the  general  power  of  the  President  to  re- 
move from  office  for  cause  persons  appointed  by 
him. 

In  the  face  of  power  so  great  and  unprecedented, 
subject  to  no  control  and  to  practically  no  restric- 
tions, it  follows  necessarily  that  all  other  provisions 
of  the  bill  are  of  secondary  importance  and,  for  the 
most  part,  of  minor  consequence. 

THE  FEDERAL  RESERVE  BOARD 

The  Federal  Reserve  Board  as  provided  shall  con- 
sist of  seven  members.  Three  ex-officio  members  are 
the  Secretaries  of  the  Treasury  and  Agriculture  and 
the  Comptroller  of  the  Currency.  Four  others  are 
appointed  by  the  President  w^ith  the  consent  of  the 
Senate,  and  of  these  one  shall  be  a  person  experienced 
in  banking,  and  from  these  four  shall  be  chosen  the 
Governor  and  vice-Governor  of  the  Board.  Mem- 
ber banks  supplying  the  capital  of  all  Federal  re- 
serve   banks    have    no    representation    whatever    on 

34 


( I  cue  nil    JJiscitssit)n. 


the  Federal  Keserve  Board  nor  any  voice  in  its  com- 
position. 

General  Powers  of  the  Board 
In  addition  to  the  large  number  of  important  spe- 
cial   powers    conferred   upon    the  Federal    Reserve 
Board  (which  are  enumerated  and  commented  upon 
elsewhere)   the  following  are  its  general  powers: 

(a)  To  examine  the  affairs  of  the  Federal  reserve 
banks  and  to  require  reports. 

(b)  To  require  or,  on  application,  to  permit  a 
Federal  reserve  bank  to  rediscount  paper  of  another 
Federal  reserve  bank.  The  pov/er  to  permit  such 
rediscount  is  proper,  but  the  authority  to  require  a 
loan  to  be  made  by  one  bank  to  another  is  entirely 
too  great  and  might  be  subject  to  grave  abuses. 

(c)  To  suspend  for  not  more  than  thirty  days, 
and  indefinitely  to  renew  suspension  for  periods  of 
not  more  than  fifteen  days,  all  reserve  requirements. 

Some  such  power  might  be  useful  in  panics,  but  it 
is  so  great  that  it  cannot  in  safety  be  delegated  to 
persons  inexperienced  in  finance  and  not  of  proved 
ability;  and  certainly  not  to  any  body  of  men  unless 
they  were  free  from  all  possible    political    influence. 

(d)  To  supervise  and  regulate  the  issue  and  re- 
tirement of  Treasury  notes  to  Federal  banks. 

This  likewise  is  a  dangerous  power.  The  retire- 
ment of  bank-notes  should  be,  and  easily  can  be,  made 
automatic.     (Fully  explained  below). 

(e)  To  add  to  the  number  of  cities  classified  as 
reserve  and  central  reserve  cities,  and  to  reclassify 
such  cities  and  to  designate  banks  therein  as  country 
banks  at  its  discretion. 

The  last  clause  is  a  joker.  No  good  purpose  can 
be  served  by  placing  such  power  in  the  hands  of  any 
board,  but  in  the  hands  of  politicians  it  would  be  sub- 
ject to  oppressive  and  dangerous  abuses.  Since  the 
power  is  restricted  to    reserve    and    central    reserve 

35 


General   Discussion. 


cities,  it  necessarily  is  aimed  at  banks  in  the  large 
cities.  None  but  political  considerations  could  have 
inspired  or  can  defend  such  an  arbitrary,  useless  and 
unnecessary  power. 

(f )  To  require  the  removal  of  officers  of  Federal 
reserve  banks. 

(g)  To  require  the  writing  off  of  doubtful  and 
worthless  debts. 

(h)  To  suspend  the  operations  of  any  Federal 
reserve  bank. 

(i)      To  perform  the  duties  specified  in  the  Act. 

The  following  are  some  of  the  additional  powers 
conferred  upon  the  Federal  reserve  board: 

I.  To  fix  regulations  for  the  establishment  of 
branches. 

Such  power  should  be  limited  or  subject  to  some 
control  because  of  the   manifest  possibilities  of  abuse. 

II.  To  create  new  districts  or  readjust  old  ones 
upon  the  application  of  ten  or  more  national  banks. 

There  does  not  appear  to  be  any  just  reason  for  ex- 
cluding state  banks  which  might  be  members,  from 
joining  in  such  applications. 

III.  The  power  to  remove  tlu'ee  directors  of  the 
Federal  reserve  banks  in  "Class  B,"  representative 
of  commercial,  agricultural  and  business  interests,  at 
the  discretion  of  the  Federal  reserve  board. 

This  power  gives  control  of  the  board  of  directors 
of  every  Federal  reserve  bank  to  the  Federal  reserve 
board,  because  in  addition  to  the  power  of  removal 
they  have  the  power  to  appoint  three  additional  di- 
rectors of  "Class  C,"  making   six  out  of  nine.    The 

POWER  OF  REMOVAL  AT  DISCRETION  WITH  NO  RIGHT  OF 
APPEAL  MEANS  CONTROL. 

IV.  The  power  to  appoint  three  directors  of  "Class 
C,"  one  of  whom  shall  be  chairman  of  the  Federal 
reserve    board,    designated    as     "Federal     Reserve 

36 


General   Discussion. 


Agent,"  and  who  is  the  ofHcial  agent  and  representa- 
tive of  the  board  of  control.  His  office  is  maintained 
nnder  regulations  of  the  Federal  board,  his  com- 
])ensation  is  fixed  by  them,  and  his  reports  are  made 
to  them.  His  removal  is  at  their  discretion,  without 
notice. 

It  would  be  difficult  to  organize  the  Fed- 
eral reserve  banks  in  respect  of  their  directors  so 
as  to  leave  the  minority  of  three  directors  represent- 
ing the  stock-holding  banks  more  helpless. 

V.  The  Federal  reserve  board  may  cancel  the 
membership  of  a  state  bank  and,  by  inference,  (al- 
though the  language  is  not  entirely  clear)  the  mem- 
bership of  a  national  bank. 

In  the  case  of  a  state  bank  the  alternative  would  be 
to  go  out  of  business  entirely  and  surrender  its  char- 
ter as  a  state  bank,  with  of  course  the  privilege  of  re- 
organizing as  a  state  bank  under  some  other  name. 
In  the  case  of  a  national  bank  the  alternative  might 
be  to  surrender  its  national  charter  and  go  out  of 
business  or  to  reorganize  as  a  state  bank. 

VI.  The  Federal  reserve  board  is  composed  of 
seven  members,  the  Secretaries  of  the  Treasury  and 
Agriculture  and  the  Comptroller  of  the  Currency 
being  ex-of!icio  members.  The  four  additional  mem- 
bers are  chosen  by  the  President,  of  whom  one  shall 
be  a  person  of  experience  in  banking.  Of  these  four 
appointees  one  shall  be  the  governor,  who  shall  be 
the  acting  managing  officer  of  the  board,  and  one 
the  vice-governor.  Thus  if  is  apparent  that  cither 
the  governor  of  the  Federal  reserve  hoard  or  the 
vice-governor  may  not  he  a  hanker  of  an?/  experience 
whatever. 

VII.  The  power  to  levy  upon  Federal  reserve  banks 
in  proportion  to  their  capital,  an  assessment  to  pay 
estimated  expenses  and  to  cover  deficits  carried  for- 
ward. 

37 

389083 


General   Discussion. 


This  power  is  absolute  and  no  limit  seems  to 
be  set  upon  the  amount  of  expenses  which  the  board 
may  incur  or  upon  the  percentage  of  assessment 
which  may  be  levied  semi-annually  upon  the  capital 
stock  of  member  banks. 

VIII.  The  power  to  determine  or  define,  with 
certain  exceptions,  the  character  of  paper  eligible  for 
re-discount. 

This  is  sound,  but  the  bill  unfortunately  confuses 
self-liquidating  commercial  assets  ivith  investment 
securities  J  and  gives  to  the  Federal  board  discretion- 
ary power  to  authorize  loans  to  be  made  directly  by 
Federal  reserve  banks  to  their  members  against 
bonds  and  other  specified  securities,  which  is  unsound 
both  in  theory  and  in  practice. 

Bank  notes  cannot  safely  be  issued  against  invest- 
ment securities.  We  cannot  drift  away  even  in  times 
of  panic  from  the  secure  anchorage  of  inherent  liq- 
uidity in  all  assets  against  which  circulating  notes 
are  issued,  if  the  notes  are  to  he  maintained  on  a  basis 
of  gold  redemption  on  demand.  Therefore,  borrow- 
ing by  individual  banks  against  investment  securi- 
ties or  unliquid  assets  of  anj^  character  should  be  left 
not  at  the  discretion  of  the  Federal  reserve  board 
but  a  matter  for  the  banks  to  arrange  amongst  them- 
selves with  their  correspondents  outside  the  Federal 
reserve  banks.  The  lending  bank,  in  turn,  if  required 
to  supply  notes  to  its  borrowing  correspondents 
should  be  required  to  procure  such  notes  from 
the  Federal  reserve  bank  out  of  its  own 
funds,  or  by  pledging  its  own  liquid  assets,  thus 
assuring  always  to  the  Federal  reserve  bank  among 
its  assets  nothing  but  quickly  maturing  mercantile 
paper.  Herein  lies  the  reason  for  keeping  all  classes 
of  discountable  paper  at  very  short  maturities.  If 
this  elemental  principle  be  ignored  the  Federal  re- 
serve banks  will  find  themselves  as  surely  and  hope- 
lessly embarrassed  in  a  panic  as  any  individual  mem- 
ber bank  will  be,  because  the  assets  of  the  Federal 

38 


deitcral    Discussion. 


reserve  banks  will  be  equally  as  unresponsive  to 
immediate  demands  because  of  inability  to  maintain 
their  oivn  reserves.  All  of  Section  14  and  that  part 
of  Section  13  relating  to  the  discount  by  Federal  re- 
serve banks  of  paper  backed  by  investment  securities 
should  be  eliminated. 

To  insure  the  quality  of  elasticity  emphasis  must 
be  laid  upon  the  fact  that  one  Federal  reserve  bank 
should  not  put  out  the  notes  of  another  bank.  The 
contention  of  one  against  the  others  to  keep  notes 
in  circulation  will  always  exactly  balance  the  amount 
of  notes  outstanding  to  the  amount  required.  The 
best  illustration  of  this  may  be  found  in  the  working 
of  the  Suffolk  Bank  System  in  New  England,  which 
gave  this  country  the  best  and  soundest  bank-note 
issues  it  has  ever  enjoyed.  There  a  number  of  banks 
located  in  different  states,  operating  imder  the  laws 
of  their  respective  states,  were  for  the  most  part 
subjected  to  no  restrictions,  or  very  loose  ones  re- 
specting the  amoimt  of  note  issues,  or  reserves  of 
gold  to  be  held  against  them,  the  sole  condition  being 
the  ability  of  a  bank  to  redeem  its  notes  at  par  on  de- 
mand in  Boston.  The  system  was  sound  and  for 
years  gave  the  coimtry  a  safe,  elastic  and  perfectly 
satisfactory  bank  note  issue.  The  principle  which 
provided  that  elasticity  was  not  statutory,  but  natural 
and  fundamental 

IX.  To  prescribe  rules  and  regulations  for  the 
purchase  and  sale  of  bills  of  exchange,  cable  transfers, 
etc.,  by  Federal  reserve  banks. 

This  is  an  entirely  unnecessary  power,  and  one 
which  should  be  left  at  the  discretion  of  the  Federal 
reserve  banks,  according  to  their  own  necessities,  or 
the  requirements  of  trade. 

X.  The  power  to  review  and  determine  mininuim 
discount  rates  for  all  classes  of  paper,  discountable 
at  Federal  reserve  banks. 

39 


General   Discussion. 


This  also  is  an  unnecessary  power,  and  one  which 
should  be  reserved  to  the  boards  of  directors  of  the 
respective  Federal  reserve  banks  according  to  their 
circumstances  and  the  status  of  their  respective  re- 
serves. Consent  of  the  Federal  reserve  board,  must 
be  obtained  by  Federal  reserve  banks  before 
opening  accounts  and  establishing  agencies  or 
banking  connections  or  doing  business  in  foreign 
countries.  This  also  is  an  iinnecessar}^  power,  sub- 
ject to  possible  abuse,  and  one  which  ought  to  be  left 
at  the  direction  of  the  management  of  the  Federal 
reserve  banks  and  their  respective  boards  of  directors. 

XI.  The  currency  provided  by  the  bill  shall  be 
issued  at  the  discretion  of  the  Federal  board. 

Here  it  may  be  well  to  lay  down  a  few  principles 
respecting  legislation  in  reference  to  the  issue  of  bank 
notes. 

The  chief  cause  of  conflict  of  opinion  respecting 
important  details  of  currency  legislation  is  a 
general  lack  of  understanding  of  the  very 
restricted  functions  of  true  bank-note  issues;  and 
a  confusion  of  these  functions  with  those  of 
latcful  money.  A  false  view  of  the  nature  of 
bank  notes  identifies  them  tcith  money  and  fails 
to  recognize  them  as  merely  credit  instruments  pass- 
ing as  the  temporary  substitutes  for  money.  Bank 
notes,  in  fact,  are  substitutes  exactly  as  a  bank  check 
or  a  draft  is  a  substitute  and  takes  the  place  of  so 
much  actual  cash  in  a  given  transaction.  A  bank  note 
does  not  rightly  possess,  and  should  not  be  given, 
any  of  the  qualities  whatever  of  lawful  money,  nor 
be  available  as  reserves  for  any  bank.  It  is  true 
that  a  bank  note  does  pass  from  hand  to  hand  with- 
out endorsement  and  performs  certain  useful  func- 
tions of  money,  but  it  does  not  in  any  respect  differ 
from  the  functions  performed  by  checks  or  bank 
drafts  where  bank-note  issues  are  scientifically  put 
out.     It  follows,  in  consequence,  that  the  relations  of 

40 


(iCiicral    Discussion. 


the   (rovenimeiit  towards   banks   of  issue   iicecl   not 
consist  in  a  regulative  interference. 

When  a  bank  note  once  has  circulated  and  is  pre- 
sented for  redemption  or  for  credit,  it  is  a  proof  that 
the  work  of  that  particular  note  is  finished  and  the 
note  itself  should  be  immediately  cancelled,  for  pre- 
cisely the  same  reasons  that  a  check  is  cancelled  wlien 
it  is  presented  and  paid.  To  re-issue  checks  and  force 
them  out  after  being  once  redeemed  would  constitute 
inflation.  It  would  be  dangerous  to  force  such  credits 
again  into  use,  for  precisely  the  same  reason  that  it 
would  be  to  put  out  redundant  issues  of  bank  notes. 
Let  the  idea  be  kept  clearly  in  mind  that  a  bank  note 
is  no  more  nor  less  than  a  bank  credit.  It  differs 
in  form  from  a  cashier's  check,  or  from  a  bank  draft, 
or  from  a  deposit  on  the  books  of  the  bank,  but  it 
is  none  the  less  a  demand  liability  of  the  bank  and 
redeemable  as  such.  The  difference  is  in  form,  but 
not  in  substance. 

The  matters  of  securing  bank  notes  by  collateral 
and  of  regulating  their  issue  by  the  Government,  are 
truly  no  more  the  proper  business  of  the  Government 
than  that  of  regulating  the  amount  of  the  deposits 
of  a  bank  or  of  its  outstanding  demand  liabilities  in 
other  forms.  Until  this  principle  is  understood,  and 
so  long  as  the  Government  attempts  to  fix  or  regulate 
the  volume  of  notes  issued  by  the  banks,  we  shall 
always  have  either  too  much  or  too  little  currency. 
Such  currency  may  be  sound,  but  we  can  never  have 
an  amount  which  automatically  adjusts  itself  to  busi- 
ness requirements  as'  do  cashiers'  checks,  certified 
checks,  bank  drafts  and  other  such  instruments.  A 
res^ulative  control  of  the  business  of  banking  and 
of  notes  issued  by  Federal  reserve  banks  ought  not 
to  be  attempted  by  the  Government  as  it  cannot  be 
successfully  and  scientifically  carried  out.  All  such 
attempts  necessarily  result  in  too  much  or  too  little 
currency.  As  potential  evils  there  is  little  choice  be- 
tween these  conditions. 

41 


General   Diseiissioii. 


PRINCIPLES  OF  BANKING  AND  CURRENCY 
LEGISLATION. 

The  following  are  some  of  the  main  principles 
which  should  underlie  banking  and  currency  legisla- 
tion so  far  as  the  Government  is  concerned. 

1.  The  establishment  of  reserve  banks  with  large 
capital  and  having  as  many  branches  as  may  be  re- 
quired. 

2.  Sound  provisions  for  the  free  flux  and  reflux 
of  bank  notes,  supported  by  strong  gold  reserves  and 
covered  by  liquid  assets  of  short  maturities. 

3.  Adequate  provisions  for  automatic  redemption ; 
and  provision  of  means  of  forcing  every  bank  to  con- 
vert its  notes  into  gold  on  demand  or  to  go  into  bank- 
ruptcy. 

In  addition  to  these  simple  regulative  measures,  the 
concern  of  the  Government  should  extend  only  to  two 
or  three  points  and  these  should  be  covered  with  the 
utmost  care.  They  involve:  (1)  the  strictest  pub- 
licity of  the  transactions  of  the  bank ;  ( 2 )  compulsory 
examinations;  (3)  frequent  reports;  (4)  strict  re- 
sponsibility on  the  part  of  the  directors  and  manag- 
ing officers;  (5)  restrictions  concerning  the  character 
of  loans  to  be  made  by  banks  of  issue  and  the  amounts 
to  be  loaned  to  any  other  bank  or  borrower.  These 
simple  provisions  abundantly  cover  every  point  of 
governmental  concern  in  a  sound  bank  note  issue. 

XII.  The  Federal  reserve  board  has  the  power  to 
accc]:)t  in  whole  or  in  part,  or  to  reject,  the  applica- 
tion of  Federal  reserve  banks  for  notes.  (This  is  in 
conflict  with  the  proper  functions  of  government 
in  respect  of  bank  note  issues,  as  explained  above). 

XIII.  To  fix  the  rate  of  interest  to  be  charged  by 
the  government  for  the  use  of  notes  issued  by  Federal 
reserve  banks. 

This  provision  strikes  at  and  undermines  the  foun- 
dations of  sound  bank  note  issues. 

42 


General    Diseussion. 


Laying  aside  tlic  question  as  to  whether  the  govern- 
ment should,  or  should  not,  reeeive  a  rate  of  hiterest 
for  such  notes,  the  provisions  of  the  bill  are  such  that 
so  far  as  the  government  is  concerned  it  is  immaterial. 
It  is  proposed  that  all  the  profits  over  and  above 
a  small  return  to  members  on  the  capital  investment 
shall  after  the  establishment  of  a  nominal  surplus 
fund  go  to  the  government.  It  follows,  therefore, 
that  if  a  tax  shall  be  laid  upon  the  notes  at  the  time  of 
their  issue,  the  tax  will  come  out  of  the  profits  of 
the  Federal  reserve  banks;  and  consequently,  in  the 
end  so  much  less  profit  will  be  returned  to  the  gov- 
ernment. This  view  is  predicated  upon  the  assump- 
tion that  the  Federal  bank  would  absorb  the  initial 
cost  in  this  case  incident  to  the  issue  of  notes,  but  in  or- 
dinary business  practice  such  an  assumption  is  false, 
for  the  cost  of  procuring  the  notes  would  be  laid  upon 
the  users  of  them,  which  of  course  would  be  the  public ; 
and  consequently  any  initial  tax  is  unnecessary  and 
lays  upon  trade  and  commerce  just  so  much  of  a 
useless  burden.  The  outflow  and  inflow  of  bank 
notes  should  be  free  and  responsive  to  trade  require- 
ments. Any  obstructions  and  burdens  laid  unon  their 
issue,  or  upon  their  retirement  are  costly  to  trade 
and  involve  dangers  especially  grave  Avhen  facilities 
for  redemption  are  not  automatic  and  in  continuous 
operation. 

XIV.  The  board  shall  make  regulations  govern- 
ing the  transfer  of  funds  at  par  among  Federal  re- 
serve banks. 

This  in  theory  is  highly  desirable  but  in 
actual  business  practice  would  be  impossible.  It 
might  be  accomplished  to  a  certain  extent  in  the 
case  of  one  central  bank  with  numerous  branches  by 
making  book  entries  at  the  head  office,  crediting  one 
branch  and  charging  another,  where  no  expense  woulcJ 
be  involved  in  the  actual  transfer  of  funds:  but  in 
the  case  of  a  number  of  independent  Federal  reserve 
banks  this  would  be  impracticable  because  of  the 
seasonal  flow  outward  of  currency  into  tlie  country 

43 


General   Discussion. 


and  of  its  flow  backward  for  redemption  at  the  sea- 
son's end.  Such  flux  and  reflux  cannot  be  accom- 
pHshed  by  book  entries.  They  must  be  made  by 
and  through  the  actual  physical  transfers  of  currency, 
and  this  entails  expense.  At  certain  seasons,  under 
vrhatever  regulations  the  board  might  impose,  there 
would  be  large  accumulations  of  credit  balances  at 
certain  Federal  reserve  banks,  and  of  debits  at  other 
points.  In  other  seasons  the  reverse  would  be  the 
case  and  in  the  meantime  such  debits  and  credits 
could  not  be  settled  by  a  mere  arbitrary  command 
to  one  regional  bank  to  remit  to  others  at  par,  for  this 
would  become  an  intolerable  and  quite  likely 
an  impossible  burden,  making  large  inroads 
upon  the  earnings  of  such  a  bank.  Particu- 
larly would  this  be  so  in  the  case  of  Federal  reserve 
banks  located  in  the  interior  and  crop-growing  sec- 
tions, where  currency  would  be  required  in  large 
quantities  at  one  time  and  not  at  another. 

The  whole  question  of  terms  and  conditions  upon 
which  one  regional  bank  shall  remit  to  another  should 
be  left  to  those  banks  to  settle  between  themselves. 
This,  however,  need  not  interfere  with  some  equitable 
arrangement  whereby  the  Federal  bank  in  any  par- 
ticular district  might  act  as  clearing  agent  for  its 
own  members,  but  not  for  banks  in  other  districts 
nor  for  other  regional  banks.  It  is  as  unsound  to 
compel  by  law  a  fixed  parity  of  exchange  at  par  be- 
tween New  York  and  San  Francisco,  at  all  times, 
regardless  of  trade  movements  as  it  would  be  to  try 
to  maintain  such  a  parity  between  New  York  and 
London. 

XV.  The  Federal  reserve  board  has  power  at  its 
discretion  to  exercise  the  functions  of  a  clearing  house 
and  to  require  each  federal  reserve  bank  to  act  as 
a  clearing  house  for  its  members.  (The  comments 
made  under  the  preceding  paragraph  also  apply 
licrc) . 

XVI.  The  Federal  reserve  board  has  the  power  to 

44 


General   Discussion. 


order  special  examinations  of  members,  and  to  lix 
the  salary  of  examiners. 

XVII.  The  board  has  power  to  prohibit  any  bank 
establishing  foreign  branches  if  deemed  inexpedient, 
even  though  the  bank  applying  for  such  privilege 
shall  be  qualified  under  the  Act. 

It  will  be  seen  from  the  foregoing  that  the  powers 
of  the  Federal  reserve  board  are  practically  unlimited^ 
and  inasmuch  as  they  are  subject  to  the  regulation  or 
control  of  no  superior  body  these  powers  are  of 
too  broad  and  sweeping  a  character  to  be  safely  en- 
trusted to  a  small  body  of  politically  appointed  men, 
but  one  of  whom  is  required  to  have  knowledge  of 
banking  or  experience  in  business.  The  mere  sug- 
gestion seems  beyond  belief. 

BRANCHES. 

Federal  reserve  banks  are  permitted  to  have  a 
number  of  branches  not  exceeding  one  for  each  $500,- 
000  of  paid-in  capital  of  the  Federal  reserve  bank. 

Considering  the  powers  and  functions  of  the  Fed- 
eral reserve  banks  and  the  fact  that  they  are  to  hold 
the  cash  reserves  of  the  banks  of  the  whole  country, 
the  proposed  minimum  of  capital  for  branches  is  en- 
tirely too  small  to  be  safe. 

By  reason  of  the  constantly  fluctuating  capital  of 
Federal  reserve  banks  due  to  the  withdrawals  of 
members  or  to  decreases  in  their  capital  and  to 
failures,  it  is  conceivable  that  in  view  of  the  small 
apportionment  of  capital  to  a  branch,  a  parent 
Federal  reserve  bank  might  find  itself  violating 
the  statute  b}'-  having  a  larger  number  of  branches 
than  its  capital  warranted.  For  instance,  at  a 
critical  time  the  withdrawal  or  failure  of  a  mem- 
ber bank  having,  say,  $5,000,000  capital  would  of 
course  necessitate  a  proportionate  reduction  in  the 
capital  of  the  Federal  reserve  bank  of  which  the 
failed  bank  was  a  member;  and  might  entail  in  con- 

45 


General   Discussion. 


sequence,  the  summary  closing  of  one  or  more 
branches  of  that  Federal  reserve  bank  so  as  to  bring 
the  number  of  branches  within  the  law.  This  would 
be  an  awkward  embarrassment  and  it  demonstrates 
the  necessitj^  for  a  high  average  proportion  of  capital 
to  be  assigned  to  each  branch. 

A  bank  becoming  a  member  of  a  Federal  reserve 
bank  appears  to  have  no  w^ay  to  relinquish  such  mem- 
bership except  (a)  in  the  case  of  a  national  bank, 
to  convert  into  a  state  bank  and  take  out  a  new 
charter;  (b)  in  the  case  of  a  state  bank  to  surrender 
its  charter  and  liquidate  or  to  reorganize  as  a  state 
bank  under  some  other  title. 

DIVISIOX  OF  EARNINGS 

^lembers  of  Federal  reserve  banks  will  be  entitled 
to  receive  5%  cumulative  dividends  on  their  capital 
invested,  and  no  more.  The  government  appropri- 
ates the  remainder  of  the  earnings  after  a  surplus 
fimd  of  20%  of  the  capital  of  the  Federal  reserve 
bank  has  been  established. 

xMtliough  suppljang  none  of  the  capital,  and 
paying  the  expenses  of  its  appointed  board 
and  of  the  administration  of  the  affairs  of 
the  Federal  reserve  banks,  (through  the  reserve 
board)  by  assessment  upon  the  member  banks,  the 
government  appropriates  the  whole  of  the  remainder 
of  the  earnings,  reserving  at  the  same  time  the  right 
to  cliarge  interest  on  notes  issued  and  also  collecting 
interest  on  government  deposits.  It  is  difficult  ta 
justify  the  theory  or  to  defend  the  ethics  of  this 
])lan  as  a  business  proposal.  Any  well  managed 
bank  through  a  series  of  years  may  earn  at  least 
5%  on  its  capital.  If  it  cannot  do  this  it  might 
better  go  out  f)f  business,  for  the  shareholders  as 
individuals  might  use  their  money  to  as  good  or 
better  advantage.  How,  then,  can  it  be  expected 
that  national  ])anks  should  willinglv  become  mem- 
bers f)f  lY'deral  Reserve  banks,  and  be  thus  deprived 

46 


('iC)icnil    J )isciissi())i. 


of  at  least  as  good  returns  upon  their  capital  as  they 
might  themselves  earn?  Will  not  this  arbitrary  ap- 
propriation of  profits  by  the  government  tend  to  keep 
well  managed  banks  out  of  the  system,  and  will  it 
not  restrain  good  state  banks  from  becoming  share- 
holders unless  the  loss  shall  be  offset  by  benefits  not 
now  apparent  in  the  plan? 

The  salaries  of  the  four  appointed  members  of 
the  reserve  board  are  to  be  paid  by  assessment  on 
Federal  reserve  banks.  The  wise  discharge  of  the 
res^^onsibilities  and  the  prudent  exercise  of  the 
great  powers  placed  in  the  hands  of  the  Federal  re- 
serve board  call  for  ability  of  the  highest  order  on 
the  part  of  individual  members  of  the  board.  Salaries 
of  $10,000  a  year  cannot  command  the  services  of 
such  men.  Appointments  on  a  board  commanding 
such  salaries  become  attractive  only  to  a  class  of 
men  ambitious  for  themselves  politically  or  other- 
wise. It  must  })e  admitted,  however,  that  any  larger 
salaries  would  {if  the  appointments  are  to  re- 
main political)  tend  only  to  increase  the  scramble 
for  the  offices  as  political  prizes ;  and  while  augment- 
ing the  dangers  as  salaries  might  be  increased,  w^ould 
not  insure  the  selection  of  a  higher  class  of  men.  This 
constitutes  another  strong  reason  why  the  Federal 
reserve  board  should  at  all  events  be  composed  of 
capable,  and  experienced  men  selected  for  their  fit- 
ness ;  and  that  they  should  be  chosen  in  some  manner 
from  among  the  ablest  and  most  experienced  officers 
and  directors  of  the  subscribing  banks.  This  is  quite 
apart  from  any  contention  by  the  member  banks  as 
to  the  right  of  such  representation  on  the  governing 
board. 

REDISCOUXTS 

Section  13  defines  the  character  of  })a])er  eligible 
for  discount  at  Federal  Reserve  banks  by  members. 

The  general  provisions  so  far  as  they  relate  to 
the    discount    of    short-time,    self-liquidating    paper 

47 


General   Discussion. 


growing  out  of  trade  transactions  are  good  and  suffi- 
cient. They  should  be  left  as  they  are.  But  a 
grave  mistake  is  made  in  giving  the  Federal  Reserve 
board  discretion  to  permit  the  discount  of  other 
paper  secured  by  bonds.  This  is  fundamentally 
wrong  in  that  it  confuses  two  different  classes  of 
banking.  The  assets  of  commercial  banks  should 
consist  of  short-time,  self-liquidating  mercantile 
assets,  while  investment  banking  contemplates  the 
possession  of  sound  but  long-time,  unliquid  securi- 
ties. Such  securities  are  not  a  sound  basis  for  cur- 
.rency  issues.  The  mistake  is  repeated  in  Section 
14,  which  provides  for  emergency  note  issues,  and 
these  have  no  place  in  a  sound  bank  note  currency. 

NOTE  ISSUES 

The  authorized  issue  of  Federal  reserve  treasury 
notes  is  $500,000,000  plus  the  amount  of  national 
bank  notes  retired  after  the  passage  of  the  act.  These 
notes  "purport"  on  their  faces  to  be  obligations  of 
the  United  States  government.  They  are  issued  only 
to  Federal  reserve  banks  at  the  discretion  of  the 
Federal  reserve  board  and  are  redeemable  on  de- 
mand at  the  United  States  Treasury  out  of  a  5% 
redem])tion  fund  held  for  that  purpose,  and  also  at 
the  Federal  reserve  banks.  These  notes  are  obtain- 
able only  on  application  to  the  Federal  reserve  board 
through  the  local  Federal  reserve  agents  of  the 
regional  banks.  They  are  to  be  secured  by  collateral 
in  the  form  of  notes,  bills  and  acceptances  of  a  class 
designated  in  the  bill  for  rediscount  by  Federal  re- 
serve banks.  These  collaterals  may  be  substituted. 
Interest  may  be  charged  for  the  use  of  notes  at  the 
discretion  of  the  Federal  reserve  board.  Such  notes 
are  a  paramount  lien  on  all  the  assets  of  the  Federal 
reserve  bank  putting  them  out. 

As  already  pointed  out,  the  notes  should  not  pur- 
port on  their  faces  to  be  what  they  are  not,  for  it  is 
a  dcce])tiori  of  the  public.  They  should  state  on  their 
faces  that  they  are  notes  of  the  particular  Federal 

48 


Ceiicral    I)iscitssiu)i. 


reserve  bank  which  issues  them.  Each  bank  should 
be  given  a  number  and  all  notes  put  out  by  or  through 
a  bank  should  bear  its  number.  The  notes  should 
not  be  intended  to  have  the  functions  of  money,  but 
only  those  of  a  true  bank  note  issue,  which  is  but  an- 
other form  of  bank  credit,  differing  in  no  respect  from 
a  credit  on  the  books  of  a  bank,  except  in  that  a  note 
may  and  does  pass  from  hand  to  hand. 

There  is  no  objection  to  regulation  and  super- 
vision on  the  part  of  the  Government  concerning  the 
manner  in  which  the  notes  are  issued,  nor  is  there 
any  objection  to  their  being  fully  secured  by  liquid 
assets  and  gold  reserve.  Neither  is  there  any  sound 
objection  to  giving  the  notes  a  prior  lien  on  all  the 
assets  of  the  issuing  bank.  But  if  this  shall  be  done 
there  is  no  reason  for  lodging  in  the  hands  of  the 
Federal  reserve  agent  segregated  ser^urities.  The 
prior  lien  carried  by  the  notes  would  cover  such  se- 
curities as  well  as  all  others.  Consequently,  the  segre- 
gation is  an  unnecessary  formality.  However, 
no  objection  is  raised  on  that  point.  The  great  thing  to 
be  desired  is  that  the  redemption  facilities  shall  be 
ample ;  and  that  strong  reserves  of  gold  shall  be  kept 
against  the  notes  and  that  the  remaining  cover  shall 
be  liquid,  and  that  they  shall  be  redeemable  on  demand 
in  gold  beyond  peradventure.  The  quality  of  elas- 
ticity can  only  be  given  by  forbidding  one  Federal 
reserve  bank  to  pay  out  the  notes  of  ailother  such 
bank,  or  to  hold  the  notes  of  another  bank  as  a  poT- 
tion  of  its  required  reserves,  or  to  deduct  such  notes 
from  its  liabilities  when  computing  reserves.  Notes 
issued  by  one  Federal  reserve  bank  should  be  re- 
deemable at  the  pleasure  of  the  holder  at  par,  in 
gold,  at  any  other  Federal  reserve  bank.  But  the 
bank  so  redeeming  them  should  at  once  return  the 
notes  either  to  the  bank  of  issue  and  take  credit  there- 
for or  require  redemption  in  gold  or  otherwise,  as 
might  best  suit  its  convenience;,  or  return  them  to 
the  Treasury  Department  for  redemption  out  of 
the  5%   fund  of  the  bank   which  issued  them   and 

49 


General   Discussion. 


thereby  take  them  out  of  circulation.  This  plan  of 
redemption  would  insure  the  circulation  at  all  times 
of  an  amount  of  notes  exactly  in  proportion  to  trade 
requirements.  The  moment  a  note  has  done  its  work 
and  is  turned  in  to  any  Federal  reserve  bank  for 
redemption  or  credit  by  any  member,  the  life  of  that 
note  is  completed  and  it  should  not  be  put  out  again, 
nor  held  on  hand  for  any  purpose.  Under  the  pro- 
posed plan  there  is  no  incentive  to  Federal  reserve 
banks  to  j^resent  for  redemption  the  notes  of  other 
banks.  In  this  respect  the  proposed  currency  would 
be  subject  to  almost  the  same  objections  as  to  in- 
elasticity which  are  now  urged  against  the  national 
bank  notes. 

The  Federal  reserve  board  may  reject  the  applica- 
tion of  any  bank  for  notes. 

This  is  an  unnecessary  power  and  one  which  not 
only  would  be  subject  to  abuses  but  might  occasion 
the  greatest  embarrassment  to  a  Federal  reserve 
bank  and  its  members.  As  already  stated,  the  flux 
and  reflux  of  bank  notes  should  be  free  and  should 
be  subject  to  no  regulations  except  the  natural  de- 
mand for  the  notes  by  the  public,  conditioned  upon  the 
ability  of  the  Federal  reserve  bank  to  maintain  the 
required  reserve  of  gold  and  the  additional  cover  of 
short-time  liquid  assets.  The  proper  method  to  pre- 
vent inflation  is  not  by  laying  an  initial  tax  either 
as  interest  or  otherwise  upon  the  notes  at  their  time 
of  issue:  but  to  begin  with  a  high  normal  reserve  of 
gokl,  and  to  begin  laying  a  tax  upon  the  deficiency  in 
the  reserves  on  a  scale  increasing  in  proportion  to  the 
amount  that  the  gold  reserves  fall  below  the  normal. 

REFUNDING  BOXDS. 

The  plan  proposes  that  United  States  2%  bonds 
deposited  to  secure  circuhition  sliall  be  refunded  into 
three  ])er  cent  2()-year  bonds  which  sliall  })e  ex- 
changed at  ])ar,  and  that  each  bank  shall  give  up  a 
proportionate  amount  of  its  circulating  privileges 
annually  for  20  years. 

50 


Ljcncral   Discussion. 


While  it  is  probable  that  ehaiigcs  are  yet  euiitein- 
plated  in  respeet  of  this  provision,  the  broad  prineiple 
may  be  laid  down  that  the  good  faith  of  the  Govern- 
ment is  pledged  to  redeeni  these  2%  bonds  eventually 
at  par.  This  might  easily  be  done  without  refunding 
if  the  redemption  of  the  whole  amount  shall  be  spread 
over  a  period  of  twenty  years  as  proposed.  That  is 
to  say,  the  Government  out  of  its  eurrent  reeeipts 
might  easily  retire  $35,000,000  of  bonds  a  year  for  the 
next  twenty  years  and  in  all  probability  be  under 
no  necessit}^  of  refunding  any  part  of  the  issue, 
either  in  three  per  cents,  or  otherwise.  But,  if  it 
should  come  about  that  we  should  go  to  war,  or  for 
any  other  reason  it  shoidd  become  necessary  for  the 
Government  to  issue  bonds,  then  such  bonds  could  be 
put  out  upon  their  merits  as  an  investment  security 
when  and  as  the  Government  might  need  to  borrow. 
The  (iovernment  intends  to,  and  will,  redeem  its  ob- 
ligations at  par,  and  for  present  purposes  that  might 
well  be  an  end  of  the  matter.  But  while  the  2%  re- 
main outstanding  let  the  present  circulating  priv- 
ileges remain  unchanged  at  least  imtil  existing  bank 
charters  expire.  In  all  such  cases,  as  charters  cease 
the  bonds  should  be  called  at  par. 

The  provisions  of  the  bill  respecting  the  amounts 
of  reserves  both  in  the  Federal  reserve  banks  and  of 
the  members  of  the  three  classes,  country  banks,  re- 
serve cities  and  central  reserve  cities,  seem  to  be  ade- 
quate and  unobjectionable.  It  would  strengthen  the 
Federal  reserve  banks  if  they  should  be  required  to 
begin  with  larger  normal  reserves  than  33  1/3%  ;  and 
to  lay  a  tax  upon  the  deficiency  in  reserves  as  they 
fall  below  the  normal  amount;  fixing  30%  as  the  ulti- 
mate minimum  of  reserves  against  demand  liabilities 
which  must  be  maintained  at  all  events.  A  reserve 
fixed  permanently  at  any  point  is  open  to  strong  ob- 
jections. The  provision  of  the  bill  that  the  reserves 
carried  by  member  banks  in  the  Federal  Reserve 
banks  shall   never  fall  heloic  the  amounts  specified, 

51 


General   Discussion. 


tie  up  the  reserves  of  the  banks  and  make  them  as 
useless  as  if  they  were  composed  of  lead.  The  theory 
is  utterly  unsound. 

BANK  EXAMINATIONS. 

The  bill  provides  that  examination  of  national 
banks  shall  be  made  by  the  Comptroller  of  the  Cur- 
rency at  least  twice  a  year  and  as  often  as  the  Fed- 
eral reserve  board  may  require.  The  Secretary  of 
the  Treasury  may  also  direct  special  examinations. 
The  salaries  of  the  examiners  are  fixed  by  the  Federal 
reserve  board  and  are  paid  by  assessments  on  the 
banks  in  proportion  to  their  assets. 

These  requirements  seem  reasonable  and  in  accord- 
ance with  sound  practice.  But,  in  addition,  the  Fed- 
eral reserve  banks  may  conduct  special  or  periodical 
examinations  of  their  members,  and  also  the  Federal 
reserve  board  may  as  often  as  desired,  and  not  less 
than  four  times  a  year,  order  examinations  of  national 
banks  in  reserve  cities. 

While  no  well  managed  bank  objects  to 
frequent  examinations  or  to  the  most  rigid 
scrutiny  of  its  affairs  and  welcomes  them  when  thor- 
oughly and  competently  done,  we  seem  here  to  have 
the  business  of  inquisition  reduced  to  an  absurdity. 
Power  to  examine  national  banks  is  vested  in  no  less 
than  four  separate  Governmental  authorities,  the 
Comptroller  of  the  Currency,  the  Secretary  of  the 
Treasury,  the  Federal  reserve  board  and  the  Fed- 
eral reserve  banks.  In  the  case  of  national  banks 
located  in  reserve  cities  there  are  no  less  than  six 
compulsory  examinations  yearly  under  Federal  au- 
thority, two  by  the  Comptroller,  four  by  the  Federal 
reserve  board,  and  as  many  more  as  they  may  choose 
to  make,  all  of  which  are  to  be  paid  for  by  the  bank 
under  examination.  These  six  Governmental  exam- 
inations together  with  those  which  are  already  con- 
ducted in  many  cities  under  Clearing  House  author- 
ity, and  also  by  the  directors  of   all    well   managed 

52 


General   Discussion. 


bunks  in  their  own  behalf,  would  keep  banks  in  the 
larger  eities  praetieally  under  eontinuous  examination 
at  great  and  unnecessary  expense,  to  the  confusion  of 
business  and  to  the  detriment  of  good  banks  by  rea- 
son of  the  suspicion  under  which  they  would  be 
brought  at  home  and  abroad  through  continuous  de- 
mands for  the  reconcilement  of  accounts.  Two  com- 
pulsory examinations  a  j^ear  under  Government  au- 
thority (made  by  the  Comptroller)  and  one 
on  the  part  of  the  directors — including  an 
audit  by  chartered  accountants — with  power  on 
the  part  of  the  Comptroller  to  examine  oftener 
if  necessary,  would  meet  all  reasonable  requirements. 
Certainly  this  would  be  sufficient  with  authorit}'  on 
the  part  of  Federal  reserve  banks  to  conduct  exam- 
inations in  special  cases  for  their  own  information. 
For  the  most  part,  all  the  information  desired  or 
necessary  could  be  obtained  by  Federal  reserve  banks, 
by  the  Secretary  of  the  Treasury,  and  by  the  Federal 
reserve  board  from  the  reports  of  examinations  made 
under  authority  of  the  Comptroller. 

These  provisions  respecting  the  examination  of  re- 
serve city  banks  afford  a  fair  illustration  of  the  ap- 
parent suspicion  and  distrust  entertained  by  the  fram- 
ers  of  the  bills  tow^ards  a  class  of  the  best  managed 
banks  in  the  country,  and  indicate  an  unwillingness 
to  believe  that  such  banks  can  be,  or  are,  honestly 
and  efficiently  administered  according  to  the  law. 

SECTION  25. 

The  second  paragraph  of  Section  25  provides  that 
no  officer  or  director  of  a  national  bank  shall  be  the 
beneficiary,  directly  or  indirectly,  of  any  transaction 
made  by  or  in  behalf  of  a  national  bank  of  which  he 
is  such  an  officer  or  director.  Presumably,  this  is  in- 
tended to  relate  only  to  fees,  commissions,  gifts  or 
like  considerations  which  might  be  given  to  an  officer 
or  director  for  loans  made  by  a  bank;  if  so  and  it  be 
so  construed,  no  reasonable  objection  could  be  raised 
to  it.  But  the  language  appears  to  be  so  broad  as  to 
cover  all  transactions;  such  for  instance,  as  a  legiti- 

53 


Goicral    Discussion. 


mate  loan  made  bj^  a  bank  officer  or  director  to  a 
mercantile  or  manufacturing  company  in  which  such 
officer  or  director  might  be  even  a  small  shareholder. 
This  certainly  goes  too  far,  for  it  would  preclude  the 
best  men  in  every  business  community  from  becom- 
ing officers  or  directors  of  local  banks.  Their  serv- 
ices  as  such  are  highly  to  be  desired  and  are  essen- 
tial to  the  sound  conduct  of  banks.  Their  influence, 
their  knowledge  and  their  experience  of  local  busi- 
ness affairs  are  invaluable  to  every  bank,  and  to  pre- 
clude them  (because  they  happen  to  be  directors  or 
officers)  from  permitting  companies  in  which  they 
may  be  shareholders  to  do  business  with  the  bank 
would  manifestly  be  an  injustice  and  one  which  the 
law  ought  not  to  impose.  The  apparent  objects  of 
the  paragraph  under  consideration  might  well  be 
retained,  and  for  good  reasons,  but  the  language 
should  be  so  changed  as  not  to  prevent  legitimate 
transactions  with  business  concerns  whose  share- 
holders might  happen  to  be  officers  or  directors  of 
a  national  bank.  Xinety  and  nine  honest  persons 
should  not  be  thus  punished  or  penalized  in  order  to 
catch  the  one  possible  rascal  of  the  himdred  average 
men. 


STOCKHOLDERS  LIABILITY. 

The  provision  holding  the  shareholders  liable  to 
assessments  sixty  days  after  transferring  their  stock 
in  good  faith  is  unfair.  It  makes  investments  in  na- 
tional bank  shares  less  attractive  to  responsible  share- 
holders. The  liability  after  transfers  of  stock  should 
be  continuous  only  when  there  is  reason  to  suspect  a 
fraud  or  lack  of  good  faith,  and  in  that  event  the 
liabiHty  shoiikl  be  practically  unlimited  as  to  time; 
or,  at  least,  it  should  continue  for  a  period  of  three 
or  more  years.  Knowledge  of  the  condition  of  a 
bank  or  reasonable  opportunity  to  possess  such 
knowledge,  as,  for  example,  in  the  case  of  an  officer 
or  a  director,  should  (when  a  stockholder's  liability 
is  to  be  asserted)  be  prima  facie  evidence  of  bad  faith 

54 


General   Discussion. 


where  such  officer  or  dirccUn-  Jiiis  truiLsrerred  his 
stock,  and  in  such  a  case  this  presumptive  knowledge 
should  fix  his  liability  indefinitely. 

FOREIGN  BRANCHES. 

Except  in  respect  of  the  discretionary  powers  given 
to  the  board  of  control,  the  provisions  of  the  bill  for 
establishing  branches  in  foreign  countries  would  do 
much  towards  promoting  and  developing  foreign 
trade. 

The  ])rinciple  of  establishing  branch  banks  is  re- 
cognized in  the  bill  both  in  the  right  granted  to  Fed- 
eral reserve  banks  to  establish  branches  and  in  the 
privilege  accorded  to  national  banks  having  a  capi- 
talization of  one  million  dollars  or  more  to  establish 
branches  in  foreign  countries.  It  would  be  highly  de- 
sirable to  extend  the  privilege  further  to  national 
banks  in  reserve  cities  and  to  permit  all  such  banks 
having  a  capital  of  not  less  than  $1,000,000  to  estab- 
lish branches  in  the  city  where  they  are  located.  With- 
in prudent  limitations  there  are  no  good  reasons  why 
such  branches  might  not  be  established  with  benefit 
to  the  banks  and  with  increased  safety  to  the  public. 

These  limitations  ought  to  be : 

1.  No  branch  to  have  less  than  the  minimum  cap- 
ital now  required  for  the  organization  of  an  inde- 
pendent national  bank  in  the  city  in  which  the  branch 
is  located. 

2.  The  requisite  ca])ital  to  be  s])ecifically  set  aside 
by  the  parent  bank  for  each  branch. 

3.  All  limitations  of  the  National  Bank  Act 
should  be  made  to  ap])ly  in  respect  of  loans  made  by 
branches  and  should  be  based  upon  their  own  capital 
in  the  same  manner  as  if  they  were  inde])endent 
banks. 

4.  ^All  loans  made  by  branches  to  any  person,  firm 
or  individual  should  constitute  a  ])ortion  of  the  loans 
included  in  the  statutory  limitations  applying  to  the 
parent  bank. 

55 


General   Discussion. 


5.  Parent  bank  should  be  liable  for  all  debts  of 
branches. 

6.  Branches  should  be  permitted  to  have  local  ad- 
visor}^ boards,  but  the  control  and  responsibility  for 
the  conduct  of  branches  should  rest  with  the  board 
of  directors  of  the  parent  bank  under  existing 
statutes. 

Branches  so  established  and  conducted  would  be 
stronger  and  in  the  large  cities  would  be  assured  bet- 
ter and  more  experienced  management,  and  would 
afford  the  depositing  public  more  safety  and  offer 
better  banking  facilities  than  is  possible  at  present 
in  the  case  of  a  large  number  of  small,  independent 
outlying  banks,  whether  state  or  national. 

The  extension  of  this  privilege  to  national  banks 
in  reserve  cities  would  be  attractive  and  would  con- 
stitute a  strong  incentive  for  their  remaining  in  the 
sj^stem.  Through  such  branches  might  be  found  a 
means  of  regaining  the  losses  of  reserve  deposits  now 
held  for  the  account  of  other  banks.  The  certain  loss 
of  these  deposits  eventually,  and  the  absence  of  any 
special  compensating  features  offered  in  the  proposed 
bill,  are  among  the  strong  reasons  for  inducing  the 
most  important  national  banks  in  the  reserve  cities  to 
abandon  the  national  banking  system.  The  chief  in- 
ducements heretofore  offered  to  national  banks  in 
Reserve  cities  to  remain  in  the  system  have  been ;  ( 1 ) , 
the  privilege  of  issuing  circulating  notes  in  which 
there  has  been  a  small  but  diminishing  profit;  and 
(2),  the  right  to  hold  the  reserves  of  other  banks. 

Now  it  is  proposed  that  both  privileges  shall  be 
taken  away  gradually. 

The  most  logical,  useful  and  attractive  benefit 
therefore,  which  could  be  offered  in  compensation  to 
national  banks  in  reserve  cities  would  be  the  privilege 
of  establishing  local  branches  in  their  own  cities;  and 
without  this  the  national  system  completely  loses  the 
special  advantages  which  it  has  heretofore  offered, 
and  in  fact,  all  advantages  whatever. 

56 


A    BILL 

To  provide  for  the  establishment  of  Federal 
reserve  banks,  for  furnishing  an  elastic  currency, 
affording  means  of  rediscounting  commercial  paper, 
and  to  establish  a  more  effective  supervision  of 
banking  in  the  United  States,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
the  short  title  of  this  Act  shall  be  tlie  "Federal  Reserve  Act.'' 

FEDERAL    RESERVE    DISTRICTS. 

Sec.  2.  That  within  ninety  days  after  the  passage  of 
this  Act,  or  as  soon  thereafter  as  practicable,  the  Secretary  of 
the  Treasury,  the  Secretary  of  Agriculture,  and  the  Comptroller 
of  the  Currency,  acting  as  "The  Eeserve-Bank  Organization 
Committee,"  sliall  designate  from  among  the  reserve  cities  now 
authorized  by  law  a  number  of  such  cities  to  be  known  as  Fed- 
eral reserve  cities,  and  shall  divide  the  continental  United  States 
into  districts,  each  district  to  contain  one  of  such  Federal 
reserve  cities:  Provided,  That  the  districts  shall  be  appor- 
tioned with  due  regard  to  the  convenience  and  customary  course 
of  business  of  the  community  and  shall  not  necessarily  coincide 
with  tlie  area  of  such  State  or  States  as  may  be  wholly  or  in 
part  included  in  any  given  district.  The  districts  thus  created 
may  be  readjusted  and  new  districts  may  from  time  to  time 
be  created  by  the  Federal  Eeserve  Board  hereinafter  estab- 
lished, acting  upon  a  joint  application  made  by  not  less  than  ten 
national  banks  situated  within  one  of  the  existing  districts.  The 
districts  thus  constituted  shall  be  known  as  Federal  reserve 
districts  and  shall  be  designated  by  number  according  to  the 
pleasure  of  the  organization  committee. 

The  organization  committee  shall,  in  accordance  with 
regulations  to  be  established  bv  itself.  ]iroceed  to  organize  in 

57 


The  Bill 

each  of  the  reserve  cities  designated  as  hereinbefore  specified 
a  Federal  reserve  bank.  Each  such  Federal  reserve  bank  shall 
include  in  its  title  the  name  of  the  city  in  which  it  is  situated, 
as  "Federal  Keserve  Bank  of  Chicago,'"'  and  so  forth.  The  total 
number  of  reserve  cities  designated  by  the  organization  com- 
mittee shall  be  not  less  than  twelve,  and  the  organization  com- 
mittee shall  be  authorized  to  employ  counsel  and  expert  aid,  to 
take  testimony,  to  send  for  persons  and  papers,  to  administer 
oaths,  and  to  make  such  investigations  as  may  be  deemed  neces- 
sary by  the  said  committee  for  the  purpose  of  determining  the 
number  of  reserve  cities  to  be  designated. 

Every  national  bank  located  within  a  given  district  shall 
be  required  to  subscribe  to  the  capital  stock  of  the  Federal 
reserve  bank  of  that  district  a  sum  equal  to  twenty  per  centum 
of  its  unimpaired  capital,  one-half  of  such  subscription  to  be 
paid  in  under  the  terms  and  conditions  prescribed  by  the  national 
banking  Act  with  reference  to  subscriptions  to  the  stock  of  na- 
tional banking  associations.  The  remainder  of  the  subscrip- 
tions or  any  part  thereof  shall  become  a  liability  of  the  sub- 
scribers, subject  to  call  and  payment  thereof  whenever  neces- 
sary to  meet  the  obligations  of  the  Federal  reserve  bank  under 
such  terms  and  in  accordance  with  such  regulations  as  the 
board  of  directors  of  said  Federal  reserve  bank  may  prescribe : 
Provided,  That  no  Federal  reserve  bank  shall  be  organized  with 
a  paid-up  and  unimpaired  capital  at  the  time  of  beginning 
business  less  in  amount  than  $5,000,000.  The  organization 
committee  shall  have  power  to  appoint  such  assistants  and  incur 
such  expenses  in  carrying  out  the  provisions  of  this  Act  as  it 
shall  deem  necessary,  and  such  expenses,  shall  be  payable  by 
the  Treasurer  of  the  United  States  upon  voucher  approved  by 
the  Secretary  of  the  Treasury,  and  the  sum  of  $100,000,  or 
so  much  thereof  as  may  be  necessary,  is  hereby  appropriated, 
out  of  any  moneys  in  the  Treasury  not  otherwise  appropriated, 
for  the  payment  of  such  expenses, 

STOCK   ISSUES. 

Sec.  3.  That  the  capital  stock  of  each  Federal  reserve 
bank  shall  be  divided  into  shares  of  $100.  The  outstanding 
capital  stock  shall  be  increased  from  time  to  time  as  subscrib- 
ing banks  increase  their  capital  or  as  additional  banks  become 
subscribers,  and  shall  be  decreased  as  subscril)ing  banks  reduce 
their  capital  or  leave  the  organization.  Each  Federal  reserve 
bank  may  establish  branch  offices  under  regulations  of  the 
Federal  Reserve  Board  at  a  point  within  the  Federal  reserve 
district  in  which  it  is  located:  Provided,  That  the  total  num- 
ber of  snoli  branches  shall  not  exceed  one  for  each  $500,000  of 
the  capital  stock  of  said  Federal  reserve  bank. 

58 


The  Bill. 


FEDERAL  RESERVE  BANKS. 


Sec.  4.  That  upon  duly  making  and  filing  with  the 
Comptroller  of  the  Currency  a  certificate  in  the  form  required 
and  described  in  sections  fifty-one  Imndred  and  thirty-four  and 
fifty-one  hundred  and  thirty-five,  Hevised  Statutes  of  the 
United  States,  such  Federal  reserve  bank  shall  become  a  body 
cor])orate  and  as  such  and  in  the  name  designated,  respectively, 
in  the  organization  certificate  shall  have  power  to  perform  all 
those  acts  and  to  enjoy  all  those  privileges  and  to  exercise  all 
those  powers  described  in  section  fifty-one  hundred  and  thirty- 
six.  Revised  Statutes,  save  in  so  far  as  the  same  shall  be  limited 
or  extended,  as  the  case  may  be,  by  the  provisions  of  this  Act. 
The  Federal  reserve  bank  so  incorporated  shall  have  succession 
for  a  period  of  twenty  years  from  its  organization,  unless  sooner 
dissolved  by  Act  of  Congress. 

Every  Federal  reserve  bank  shall  be  organized  and  con- 
ducted under  the  oversight  and  control  of  a  board  of  directors, 
whose  powers  shall  be  the  same  as  those  conferred  upon  the 
boards  of  directors  of  national  banking  associations  under  exist- 
ing law,  except  in  so  far  as  expressly  provided  to  the  contrary 
in  this  Act.  Such  board  of  directors  shall  be  constituted  and 
elected  as  hereinafter  specified  and  shall  consist  of  nine  mem- 
bers, holding  office  for  three  years  and  divided  into  three 
classes,  designated  as  classes  A,  B,  and  C. 

Class  A  shall  consist  of  three  members,  who  shall  be 
chosen  by  and  be  representative  of  the  stock-holding  banks. 

Class  B  shall  consist  of  three  members,  who  shall  be  repre- 
sentative of  the  general  public  interests  of  the  reserve  district. 

Class  C  shall  consist  of  three  members,  who  shall  be  desig- 
nated by  the  Federal  Reserve  Board. 

Directors  of  class  A  shall  be  chosen  in  the  following 
manner : 

It  shall  be  the  duty  of  the  chairman  of  the  board  of  di- 
rectors of  the  Federal  reserve  bank  of  the  district  in  which  each 
such  bank  is  situated  to  classify  the  member  banks  of  the  said 
district  who  are  stockholders  in  the  said  Federal  reserve  bank 
into  three  general  groups  or  divisions.  Each  such  group  shall 
contain  as  nearly  as  may  be  one-third  of  the  aggregate  number 
of  the  banks  holding  stock  in  the  Federal  reserve  bank  of  the 
said  district  and  shall  consist  of  banks  of  similar  capitalization. 
The  said  groups  shall  be  designated  by  number  at  the  pleasure 
of  the  chairninn  of  the  Federal  reserve  bank. 

At  a  regularly  called  directors'  meeting  of  each  national 
bank  in  the  Federal  reserve  district  aforesaid,  the  board  of 
directors  of  sueli  nioinl^er  liank  shall  elect  bv  ballot  one  of  its 


The  Bill. 

own  members  as  a  district  reserve  elector  and  shall  certify  his 
name  to  the  chairman  of  the  board  of  directors  of  the  Federal 
reserve  bank  of  the  district.  The  said  chairman  shall  establish 
lists  of  the  district  reserve  electors,  class  A,  thus  named  by 
banks  in  each  of  the  aforesaid  three  groups  and  shall  transmit 
one  list  to  each  such  elector  in  each  group.  Every  elector  shall, 
within  fifteen  days  of  the  receipt  of  the  said  list,  select  and 
certify  to  the  said  chairman  from  among  the  names  on  the 
list  pertaining  to  his  group,  transmitted  to  him  by  the  chair- 
man, one  name,  not  his  own,  as  representing  his  choice  for 
Federal  reserve  director,  class  A.  The  name  receiving  the  great- 
est number  of  votes,  not  less  than  a  majority,  shall  be  designated 
by  said  chairman  as  Federal  reserve  director  for  the  group  to 
which  he  belongs.  In  case  no  candidate  shall  receive  a  majority 
of  all  votes  cast  in  any  district,  the  chairman  aforesaid  shall 
establish  an  eligible  list,  including  the  three  names  receiving 
the  greatest  number  of  votes  on  the  first  ballot,  and  shall  trans- 
mit said  list  to  the  electors  in  each  of  the  groups  of  banks 
established  by  him.  Each  elector  shall  at  once  select  and  certify 
to  the  said  chairman  from  among  the  three  names  submitted 
to  him  his  choice  for  Federal  reserve  director,  class  A,  and  the 
name  receiving  the  greatest  number  of  such  votes  shall  be  desig- 
nated by  the  chairman  as  Federal  reserve  director,  class  A. 

Directors  of  class  B  shall  be  chosen  at  the  same  time  and 
in  the  same  manner  hereinbefore  prescribed  for  directors  of  class 
A,  except  that  they  shall  in  no  case  be  officers  or  directors  of 
an}'  bank  or  banking  association,  and  shall  not  accept  office  as 
such  during  the  term  of  their  service  as  directors  of  the  Fed- 
eral reserve  bank.  They  shall  be  fairly  representative  of  the 
commercial,  agricultural  or  industrial  interests  of  their  respec- 
tive districts.  The  Federal  Eeserve  Board  shall  have  power 
at  its  discretion  to  remove  any  director  of  class  B  in  any  Fed- 
eral reserve  bank,  if  it  should  appear  at  any  time  that  such 
director  does  not  fairly  represent  the  commercial,  agricultural  or 
industrial   interests  of  his  district. 

Three  directors  belonging  to  class  C  shall  be  chosen  directly 
by  the  Federal  Eeserve  Board  one  of  whom  shall  be  designated 
by  said  board  as  chairman  of  the  board  of  directors  of  the 
Federal  reserve  bank  of  the  district  to  which  he  is  appointed 
and  shall  be  designated  as  "Federal  reserve  agent."  In  addi- 
tion to  his  duties  as  chairman  of  the  board  of  directors  of  the 
Federal  reserve  bank  of  the  district  to  which  he  is  appointed, 
he  shall  be  required  to  maintain  under  regulations  to  be  estab- 
lished by  the  Federal  Eeserve  Board  a  local  office  of  said  board 
which  shall  be  situated  on  the  premises  of  the  Federal  reserv? 
bank  of  the  district.  He  shall  make  regular  reports  to  the 
Federal  Eeserve  Board,  and  shall  act  as  its  official  representative 

60 


The  Bill. 

for  the  peri'oriuancc  oi'  the  functions  conrerrud  upon  it  by  this 
Act.  He  shall  be  paid  an  annual  compensation  to  be  fixed  by 
the  Federal  Reserve  Board  and  to  be  paid  hira  monthly  by 
the  Federal  reserve  bank  to  which  he  is  designated. 

The  Keserve  Bank  Organization  Committee  may,  in  or- 
ganizing Federal  reserve  banks  for  the  first  time,  call  such 
meetings  of  bank  directors  in  the  several  districts  as  may  be 
necessary  to  carry  out  the  purposes  of  this  Act  and  may  exer- 
cise the  functions  herein  conferred  upon  the  chairman  of  the 
board  of  directors  of  each  Federal  reserve  bank  pending  the 
complete  organization  of  such  bank. 

At  the  first  meeting  of  the  full  board  of  directors  of  each 
Federal  reserve  bank  subsequent  to  the  organization  of  such 
bank  it  shall  be  the  duty  of  the  directors  of  classes  A  and  B  and 
C  each  to  designate  one  of  its  members  whose  term  of  office 
shall  expire  in  one  year  from  the  first  of  January  nearest  to 
date  of  such  meeting,  one  whose  term  of  office  shall  expire  at 
the  end  of  two  years  from  said  date,  and  one  whose  term  of 
office  shall  expire  at  the  end  of  three  years  from  said  date. 
Thereafter  every  director  of  a  Federal  reserve  bank  chosen  as 
hereinbefore  provided  shall  hold  office  for  a  term  of  three  years 
but  the  chairman  of  the  board  of  directors  of  each  Federal  re- 
serve bank  designated  by  the  Federal  Eeserve  Board,  as  herein- 
before described,  shall  be  removable  at  the  pleasure  of  the  said 
board  without  notice,  and  his  successor  shall  hold  office  during 
the  unexpired  term  of  the  director  in  whose  place  he  was 
appointed. 

INCREASE  AND  DECREASE  OF  CAPITAL. 

Sec.  5.  That  shares  of  the  capital  stock  of  Federal  re- 
serve banks  shall  not  be  transferable,  nor  be  hypothecated;  in 
case  a  subscribing  bank  increases  its  capital,  it  shall  thereupon 
subscribe  for  an  additional  amount  of  capital  stock  of  the 
Federal  reserve  bank  of  its  district  equal  to  twenty  per  centum 
of  the  bank's  own  increase  of  capital,  paying  therefor  the  then 
book  value  of  the  shares  of  the  reserve  bank  as  shown  by  the 
last  published  statement  of  said  bank.  A  bank  applying  for 
stock  in  a  Federal  reserve  bank  at  any  time  after  the  formation 
of  the  latter  must  subscribe  for  an  amount  of  the  capital  of 
said  reserve  bank  equal  to  twenty  per  centum  of  the  capital  of 
said  subscribing  bank,  paying  therefor  its  then  book  value  as 
shown  by  the  last  published  statement  of  said  reserve  bank. 
"\Mien  the  capital  of  any  Federal  reserve  bank  has  been  in- 
creased, either  on  account  of  the  increase  of  capital  of  the  banks 
holding  stock  therein  or  on  account  of  the  increase  in  the  num- 
ber of  stockholding  banks,  the  board  of  directors  shall  make  and 
execute  a  certificate  to  the  Comptroller  of  the  Currency  show- 

61 


The  Bill. 

ing  said  increase  in  capital,  the  amount  paid  in,  and  by  wnom 
paid.  In  case  a  subscribing  bank  reduces  its  capital  it  shall 
surrender  a  proportionate  amount  of  its  holdings  in  the  capital 
of  said  Federal  reserve  bank,  and  if  a  bank  goes  into  voluntary 
liquidation  it  shall  surrender  all  of  its  holdings  of  the  capital 
of  said  Federal  reserve  bank.  In  either  case  the  shares  sur- 
rendered shall  be  canceled  and  the  bank  shall  receive  in  pay- 
ment therefor  a  sum  equal  to  their  then  book  value  as  shown 
by  the  last  published  statement  of  said  Federal  reserve  bank. 

Sec.  G.  That  if  any  shareholder  of  a  Federal  reserve 
bank  shall  become  insolvent  and  a  receiver  be  appointed  the 
stock  held  by  it  in  said  Federal  reserve  bank  shall  be  canceled, 
and  the  balance  of  its  value,  after  paying  all  debts  due  by  such 
insolvent  banlv  to  said  Federal  reserve  bank,  shall  be  paid  to 
the  receiver  of  the  insolvent  bank.  Whenever  the  capital  stock 
of  a  Federal  reserve  bank  is  reduced,  either  on  account  of  a 
reduction  in  capital  of  the  banks  holding  its  stock  or  of  the 
liquidation  or  insolrency  of  any  such  bank  holding  stock  therein, 
the  board  of  directors  shall  make  and  execute  a  certificate  to 
the  Controller  of  the  Currency  showing  such  reduction  of 
capital  stock  and  the  amount  repaid  to  each  bank. 

DIVISION   OF  EARNINGS. 

Sec.  7.  That  the  earnings  of  each  Federal  reserve  bank 
shall  be  disposed  of  in  the  following  manner : 

After  the  payment  of  all  expenses  and  taxes,  the  share- 
holders shall  be  entitled  to  receive  an  annual  dividend  of  five 
per  centum  on  the  paid-in  capital,  which  dividend  shall  be  cumu- 
lative. One-half  of  the  net  earnings,  after  dividend  claims, 
as  hereinbefore  provided,  have  been  met,  shall  be  paid  into  the 
surplus  fund  until  said  fund  shall  amount  to  twenty  per  centum 
of  the  paid-in  capital  of  such  bank,  and  the  remaining  one- 
half  shall  be  paid  to  the  United  States ;  and  whenever  and  so 
long  as  the  surplus  fund  of  such  Federal  reserve  bank  amounts 
to  twenty  per  centum  of  the  paid-in  capital  and  the  share- 
holders shall  have  received  the  dividends  at  the  rate  of  five 
per  centum  per  annum  hereinbefore  provided  for,  all  excess 
earnings  shall  be  paid  to  the  United  States. 

Every  Federal  reserve  bank  incorporated  under  the  terms 
of  this  Act  shall  be  exempt  from  Federal,  State,  and  local  taxa- 
tion, except  in  respect  to  taxes  upon  real  estate. 

Sec.  8.  That  any  national  banking  association  heretofore 
organized  may  at  any  time  within  one  year  from  the  passage 
of  this  Act,  and  with  the  approval  of  the  Comptroller  of  the 
Currency,  be  granted,  as  herein  provided,  all  the  rights,  and  be 
siihjort   to  nil   the   liabilities,  of  national   banking  associations 

62 


The  Bill. 

organized  subsequuiiL  to  the  passage  ol'  tliis  Act:  Provided, 
That  such  action  on  the  part  of  such  associations  shall  be 
authorized  by  the  consent  in  writing  of  shareholders  owning 
not  hss  than  a  majority  of  the  capital  stock  of  the  association. 
Any  national  Ijanking  association  now  organized  which  shall 
not,  within  one  year  after  the  passage  of  this  Act,  become  a 
national  banking  association  under  the  provisions  hereinbefore 
stated,  or  which  shall  fail  to  comply^  with  any  of  the  provisions 
of  tliis  Act,  shall  be  dissolved;  but  such  dissolution  shall  not 
take  away  or  impair  any  remedy  against  such  corporation,  its 
stockholders  or  officers,  for  any  liability  or  penalty  which  shall 
have  previously  been  incurred. 

Sec.  D.  That  any  bank  or  banking  association  incorpor- 
ated by  special  law  of  any  State  or  of  the  United 
States,  or  organized  under  the  general  laws  of  any  State 
of  the  United  States,  and  having  an  unimpaired  capital  suffi- 
cient to  entitle  it  to  become  a  national  banking  association  under 
the  jirovisions  of  this  Act,  may,  by  the  consent  in  writing  of 
the  shareholders  owning  not  less  than  fifty-one  per  centum  of 
the  capital  stock  of  such  bank  or  banking  association,  and  with 
the  approval  of  the  Comptroller  of  the  Currency,  become  a 
national  banking  association  under  its  former  name  or  by  any 
name  approved  l)y  the  comptroller.  The  directors  thereof  may 
continue  to  be  the  directors  of  the  association  so  organized  until 
others  are  elected  or  appointed  in  accordance  with  the  provisions 
of  the  law.  When  the  comptroller  has  given  to  such  bank  or 
banking  association  a  certificate  that  the  provisions  of  this  Act 
have  been  complied  with,  such  bank  or  banking  association,  and 
all  its  stockholders,  officers,  and  employees,  shall  have  the  same 
powers  and  privileges,  and  shall  be  subject  to  the  same  duties, 
liabilities,  and  regulations,  in  all  respects,  as  shall  have  been 
prescribed  for  associations  originally  organized  as  national  bank- 
ing associations  under  this  Act. 

STATE   BANKS   AS    MEMBERS. 

Sec.  10.  That  from  and  after  the  passage  of  this  Act 
any  bank  or  banking  association  or  trust  company  incorporated 
by  special  law  of  any  State,  or  organized  under  the  general  laws 
of  any  State  or  the  United  States,  may  make  application  to  the 
Federal  Eeserve  Board  hereinafter  created  for  the  right  to  sub- 
scribe to  the  stock  of  the  Federal  reserve  bank  organized  within 
the  Federal  reserve  district  where  located.  The  Federal  Re- 
serve Board  may.  at  its  discretion,  subject  to  the  provisions  of 
this  section,  entitle  such  applying  bank  to  become  a  stockholder 
in  the  Federal  reserve  bank  of  the  district  in  which  such  apply- 
ing bank  is  located,  or  at  its  discretion  may  reject  such  applicn 

63 


^ The  Bill. 

tion  or  cancel  the  membership  of  a  bank.  Whenever  the  Federal 
Reserve  Board  may  entitle  such  an  applying  bank  to  become  a 
stockholder  in  the  Federal  reserve  bank  of  the  district  in  which 
the  applving  bank  is  located,  stock  shall  be  issued  and  paid  for 
under  the  rules  and  regulations  in  this  Act  provided  for  na- 
tional banks  which  become  stockholders  in  Federal  reserve  banks. 
It  shall  be  the  duty  of  the  Federal  Reserve  Board  to  estab- 
lish by-laws  for  the  general  government  of  its  conduct  in  act- 
ing upon  applications  made  by  the  State  hanks  and  banking 
associations  and  trust  companies  hereinbefore  referred  to  for 
stock  ownership  in  Federal  reserve  banks.  Such  by-laws  shall 
require  of  applying  banks  not  organized  under  Federal  law 
that  they  comply  with  the  reserve  requirements  and  submit  to 
the  inspection  and  regulation  provided  in  this  Act.  No  such 
applying  bank  shall  be  admitted  to  stock  ownership  in  a  Fed- 
eral reserve  bank  unless  it  possesses  a  paid-up  unimpaired 
capital  sufficient  to  entitle  it  to  become  a  national  banking  asso- 
ciation in  the  place  where  it  is  situated,  under  the  provisions 
of  the  national  banking  Act,  and  conforms  to  the  provisions 
herein  prescribed  for  national  banking  associations  of  similar 
capitalization  and  to  the  regulations  of  the  Federal  Reserve 
Board. 

If  at  any  time  it  shall  appear  to  the  Federal  Reserve  Board 
that  a  banking  association  or  trust  company  organized  under 
the  laws  of  any  State  or  of  the  United  States  has  failed  to 
comply  with  the  provisions  of  this  section  or  the  regulations 
of  the  board,  it  shall  be  within  the  power  of  the  said  board  to 
require  such  banking  association  or  trust  company  to  surrender 
its  stock  in  the  Federal  reserve  bank  in  which  it  holds  shares  upon 
receiving  from  such  bank  the  then  book  value  of  the  said  shares 
in  current  funds,  and  said  Federal  reserve  bank  shall  upon 
notice  from  the  Federal  Reserve  Board  be  required  to  suspend 
the  designated  banking  association  or  trust  company  from  fur- 
ther privileges  of  membership,  and  shall  within  thirty  days  of 
such  notice  cancel  and  retire  its  shares  and  make  payment.there- 
for  in  the  manner  herein  provided. 

FEDERAL  RESERVE  BOARD. 

Sec.  11.  That  tlicre  shall  be  created  a  Federal  Reserve 
Board,  which  shall  consist  of  seven  members,  including  the  Sec- 
retary of  the  Treasury,  the  Secretary  of  Agriculture,  and  the 
Comptroller  of  the  Currency,  who  shall  be  members  ex  officio, 
and  four  members  chosen  by  the  President  of  the  United  States, 
by  and  with  the  advice  and  consent  of  the  Senate.  The  four 
members  of  the  Federal  Reserve  Board  chosen  by  the  President 
and  confirmed  as  aforesaid  shall  each  receive  an  annual  salary 

64 


The  Bill. 

of  $10,000;  and  the  Comptroller  of  the  Currency,  as  ex  officio 
member  of  said  Federal  Eeserve  Board,  shall,  in  addition  to  the 
salary  now  paid  him  as  comptroller,  rt'ceive  the  sum  of  $5,000 
annually  for  his  services  as  a  member  of  said  l)oard.  Of  those 
thus  appointed  l)y  the  President  at  least  one  shall  be  a  person 
experienced  in  banking;  and  one  shall  serve  for  two,  one  for 
four,  one  for  six,  and  one  for  eight  years,  respectively,  and 
thereafter  each  member  so  appointed  shall  serve  for  a  term  of 
eight  years  unless  sooner  removed  for  cause  by  the  President. 
Of  the  four  persons  thus  appointed,  one  shall  be  designated 
governor  and  one  vice  governor  of  the  Federal  Keserve  Board. 
The  governor  of  the  Federal  Reserve  Board,  subject  to  the 
supervision  of  the  Secretary  of  the  Treasury  and  board,  shall 
be  the  active  managing  officer  of  the  Federal  Reserve  Board. 

The  Federal  Reserve  Board  shall  have  power  to  levy  semi- 
annually upon  the  Federal  reserve  banks,  in  proportion  to  capital, 
an  assessment  sufficient  to  pay  its  estimated  expenses  for  the  half 
year  succeeding  the  levying  of  such  assessment,  together  with 
any  deficit  carried  forward  from  the  preceding  half  year. 

The  first  meeting  of  the  Federal  Reserve  Board  shall  be 
held  in  Washington,  District  of  Columbia,  as  soon  as  may  be 
after  the  passage  of  this  Act,  and  after  the  organization  of  Fed- 
eral reserve  banks  in  the  several  districts,  as  herein  provided, 
at  a  date  to  be  fixed  by  the  Reserve  Bank  Organization  Com- 
mittee hereinbefore  created.  The  Secretary  of  the  Treasury 
shall  be  ex  officio  chairman  of  the  Federal  Reserve  Board.  No 
member  of  the  Federal  Reserve  Board  shall  continue  to  hold 
office  or  to  act  as  a  director  of  any  bank  or  banking  institution 
or  Federal  reserve  bank ;  and  before  entering  upon  his  duties 
as  a  member  of  the  Federal  Reserve  Board  he  shall  certify  under 
oath  to  the  Secretary  of  the  Treasury  that  he  has  complied  with 
this  requirement.  Wlienever  a  vacancy  shall  occur  among  the 
four  members  of  the  Federal  Reserve  Board  chosen  by  the  Presi- 
dent, as  above  provided,  a  successor  shall  be  appointed  by  the 
President,  with  the  advice  and  consent  of  the  Senate,  to  fill  such 
vacancy,  and  when  chosen,  shall  hold  office  for  the  unexpired 
term  of  the  member  whose  place  he  is  selected  to  fill. 

Section  three  hundred  and  twenty-four  of  the  Revised 
Statutes  of  the  United  States  shall  be  amended  so  as  to  read 
as  follows :  "There  shall  be  in  the  Department  of  the  Treasury 
a  bureau  charged,  except  as  in  this  Act  otherwise  provided,  with 
the  execution  of  all  laws  passed  by  Congress  relating  to  the 
issue  and  regulation  of  currency  issued  by  national  banking 
associations,  the  chief  officer  of  which  bureau  shall  be  called  the 
Comptroller  of  the  Currency,  and  shall  perform  his  duties  under 
the  general  direction  of  the  Secretary  of  the  Treasury,  acting 
as  the  chairman  of  the  Federal  Reserve  Board." 

65 


• The  Bill. 

Sec.  12.  That  the  Federal  Eeserve  Board  hereinbefore 
established  shall  be  authorized  and  empowered: 

(a)  To  examine  at  its  discretion  the  accounts,  books,  and 
affairs  of  each  Federal  reserve  bank  and  to  require  such  state- 
ments and  reports  as  it  may  deem  necessary, 

(b)  To  require  or  on  application  to  permit  a  Federal 
reserve  bank  to  rediscount  the  paper  of  any  other  Federal  re- 
serve bank. 

(c)  To  suspend  for  a  period  not  exceeding  thirty  days 
(and  to  renew  such  suspension  for  periods  not  to  exceed  fifteen 
days)  any  and  every  reserve  requirement  specified  in  this  Act: 

(d)  To  supervise  and  regulate  the  issue  and  retirement 
of  Treasury  notes  to  Federal  reserve  banks. 

(e)  To  add  to  the  number  of  cities  classified  as  reserve 
and  central  reserve  cities  under  existing  law  in  which  national 
banking  associations  are  subject  to  the  reserve  requirements  set 
forth  in  section  twenty-one  of  this  Act ;  or  to  reclassify  exist- 
ing reserve  and  central  reserve  cities  and  to  designate  the  banks 
therein  situated  as  country  banks  at  its  discretion. 

(f)  To  require  the  removal  of  officials  of  Federal  reserve 
banks  for  incompetency,  dereliction  of  duty,  fraud,  or  deceit. 

(g)  To  require  the  writing  off  of  doubtful  or  worthless 
assets  upon  the  books  and  balance  sheets  of  Federal  reserve 
banks. 

(h)  To  suspend  the  further  operations  of  any  Federal  re- 
serve bank  and  appoint  a  receiver  therefor. 

(i)  To  perform  the  duties,  functions,  or  services  specified 
or  implied  in  this  Act. 

REDISCOUNTS. 

Sec.  13.  That  any  Federal  reserve  bank  may  receive  from 
any  of  its  stockholders  deposits  of  current  funds  in  lawful 
money,  national-bank  notes,  Federal  reserve  notes,  or  checks 
and  drafts  upon  solvent  banks,  domestic  and  foreign,  or  ac- 
ceptances authorized  by  this  Act. 

Upon  the  indorsement  of  any  member  bank  any  Federal 
reserve  bank  may  discount  notes  and  bills  of  exchange  arising 
out  of  commercial  transactions;  that  is,  notes  and  bills  of  ex- 
change issued  or  drawn  for  agricultural,  industrial,  or  com- 
mercial purposes,  the  Federal  Reserve  Board  to  have  the  right 
to  determine  or  define  the  character  of  the  paper  thus  eligible 
for  discount,  within  the  meaning  of  tliis  Act;  but  such  defini- 
tion shall  not  include  notes  or  bills  issued  or  drawn  for  the 
purpose  of  carrying  or  trading  in  stocks,  bonds,  or  other  invest- 
ment securities,  except  notes  or  bills  having  a  maturity  of  not 

66 


///,-  II Ul. 

exccL'cling  lour  iiionllis  and  seeiircd  by  I  iiited  ^States  bonds  or 
bonds  issued  by  any  State,  county,  or  municipality  of  the  United 
States.  Notes  and  hills  admitted  to  discount  under  the  terms 
of  this  paragraph  must  have  a  maturity  of  not  more  than  forty- 
five  days. 

Upon  the  indorsement  of  any  member  bank  any  Federal 
reserve  bank  may  discount  the  paper  of  the  classes  hereinbefore 
described  having  a  maturity  of  more  than  forty-five  and  not 
more  than  one  hundred  and  twenty  days,  when  its  own  cash 
reserve  exceeds  thirty-three  and  one-third  per  cent,  of  its  total 
outstanding  demand  liabilities;  but  not  more  than  fifty  per 
cent,  of  the  total  paper  so  discounted  for  any  depositing  bank 
shall  have  a  maturity  of  more  than  sixty  days. 

Upon  the  indorsement  of  any  member  bank  any  Federal 
reserve  bank  may  discount  acceptances  of  such  banks  which 
are  based  on  the  exportation  or  importation  of  goods  and  Avhich 
mature  in  not  more  than  ninety  days  and  bear  the  signature  of 
at  least  one  member  bank  in  addition  to  that  of  the  acceptor. 
The  amount  so  discounted  shall  at  no  time  exceed  one-half  the 
capital  of  the  bank  for  which  the  rediscounts  are  made.  The 
aggregate  of  such  notes  and  bills  bearing  the  signature  or  in- 
dorsement of  any  one  person,  company,  firm,  or  corporation 
rediscounted  for  any  one  bank  shall  at  no  time  exceed  ten  per 
centum  of  the  unimpaired  capital  and  surplus  of  said  bank. 

Any  member  bank  may,  at  its  discretion,  accept  drafts  or 
bills  of  exchange  drawn  upon  it  having  not  more  than  six 
months  sight  to  run  and  growing  out  of  transactions  involving 
the  importation  or  exportation  of  goods ;  but  no  bank  shall  ac- 
cept such  bills  to  an  amount  equal  in  the  aggregate  to  more 
than  one-half  the  face  value  of  its  paid-up  and  unimpaired 
capital. 

Sec.  14.  Whenever  in  the  opinion  of  the  Federal  Eeserve 
Board  the  public  interest  so  requires,  the  Federal  Eeserve  Board 
may  authorize  the  reserve  bank  of  the  district  to  discount  the 
direct  obligations  of  member  banks,  secured  by  the  pledge  and 
deposit  of  satisfactory  securities ;  but  in  no  case  shall  the  amount 
so  loaned  by  a  Federal  reserve  bank  exceed  three-fourths  of  the 
actual  value  of  the  securities  so  ]iledged  or  one-half  the  amount 
of  the  paid-up  and  unimpaired  capital  of  the  memlu'r  Itank. 

OPEN-MARKET   OPERATIONS. 

Sec.  15.  That  any  Federal  reserve  bank  may,  under  rules 
and  regulations  prescribed  by  the  Federal  Eeserve  Board,  pur- 
chase and  sell  in  the  open  market,  either  from  or  to  domestic 
or  foreign  banks  or  individuals,  bankers'  bills,  cable  transfers, 

67 


The  Bill. 

and  bills  of  exchange  of  the  kinds  and  maturities  by  this  Act 
made  eligible  for  rediscount. 

Every  Federal  reserve  bank  shall  have  power  (a)  to  deal 
in  gold  coin  and  bullion  both  at  home  and  abroad,  to  make 
loans  thereon,  and  to  contract  for  loans  of  gold  coin  or  bul- 
lion, giving  therefor,  when  necessary,  acceptable  security,  in- 
cluding the  hypothecation  of  United  States  bonds;  (b)  to 
invest  in  United  States  bonds  and  in  short-time  obligations  of 
the  United  States  or  its  dependencies  or  of  any  State  or  foreign 
Government;  (c)  to  purchase  from  member  banks  and  to  sell, 
with  or  without  its  indorsement,  checks  or  bills  of  exchange 
arising  out  of  commercial  transactions,  as  hereinbefore  defined, 
payable  in  foreign  countries;  but  such  bills  of  exchange  must 
have  not  exceeding  ninety  days  to  run  and  must  bear  the  signa- 
ture of  two  or  more  responsible  parties,  of  which  the  last  shall 
be  that  of  a  subscribing  bank;  (d)  to  establish  each  week, 
or  as  much  oftener  as  required,  subject  to  review  and  deter- 
mination of  the  Federal  Eeserve  Board,  a  minimum  rate  of 
discount  to  be  charged  by  such  bank  for  each  class  of  paper, 
which  shall  be  made  with  a  view  to  accommodating  the  com- 
merce of  the  country  and  promoting  a  stable  price  level;  and 
(e)  with  the  consent  of  the  Federal  Eeserve  Board,  to  open  and 
maintain  banking  accounts  in  foreign  countries  and  establish 
agencies  in  such  countries  wheresoever  it  may  deem  best  for  the 
purpose  of  purchasing,  selling,  and  collecting  foreign  bills  of 
exchange,  and  to  buy  and  sell  with  or  without  its  indorsement, 
through  such  correspondents  or  agencies,  checks  or  prime 
foreign  bills  of  exchange  arising  out  of  commercial  transactions 
which  have  not  exceeding  ninety  days  to  run  and  wbicli  bear  the 
signature  of  two  or  more  responsible  parties. 

GOVERNMENT  DEPOSITS. 

Sec.  16.  That  all  moneys  now  held  in  the  general  fund 
of  the  Treasury  shall,  upon  the  direction  of  tlie  Secretary  of 
the  Treasury,  within  twelve  months  of  the  passage  of  this  Act, 
be  deposited  in  Federal  reserve  banks,  which  shall  act  as  fiscal 
agents  of  the  United  States ;  and  thereafter  the  revenues  of  the 
Government  shall  be  regularly  deposited  in  such  banks,  and 
disbursements  shall  be  made  by  checks  drawn  against  such 
deposits. 

The  Secretary  of  the  Treasury  shall,  from  tiinc  to  time, 
apportion  the  funds  of  the  Government  among  tlio  said  Federal 
reserve  banks,  and  may,  at  his  discretion,  cliarge  interest  thereon 
and  fix,  from  month  to  month,  a  rate  which  shall  be  regularly 
paid  by  the  banks  holding  such  deposits:  Provided,  That  no 
Federal  reserve  bank  shall  pay  interest  upon  any  deposits  except 
those  of  the  United  States. 

68 


The  Bill. 

The  Government  of  the  United  States  and  the  banks  de- 
positing in  the  Federal  reserve  banks  shall  be  the  only  depos- 
itors in  said  reserve  banks.  All  domestic  transactions  of  the 
Federal  reserve  banks  involving  a  rediscount  operation  or  the 
creation  of  deposit  accounts  shall  be  confined  to  the  Govern- 
ment and  the  depositing  ])anks,  with  the  exception  of  the  pur- 
chase or  sale  of  Government  or  State  securities,  or  securities  of 
foreign  Governments,  or  of  gold  coin  or  bullion. 


NOTE   ISSUES. 

Sec.  17.  That  an  issue  of  Federal  Eeserve  Treasury  notes 
not  to  exceed  $500,000,000  and  in  addition  thereto  a  sum  equal 
to  the  difference  between  the  total  amount  of  national  bank 
notes  outstanding  at  any  given  moment  and  the  amount  of  such 
notes  outstanding  at  the  passage  of  this  Act  is  hereby  authorized. 
The  said  notes  shall  purport  on  their  faces  to  be  the  obligations 
of  the  United  States,  and  shall  be  issued,  at  the  discretion  of  the 
Federal  Eeserve  Board,  and  solely  for  the  purpose  of  making 
advances  to  Federal  reserve  banks,  as  hereinafter  set  fortlu 
They  shall  be  receivable  for  all  taxes,  customs,  and  other  public 
dues,  and  shall  be  redeemed  in  gold  on  demand  at  the  Treasuiy 
Department  in  the  city  of  Washington,  District  of  Columbia,  or 
at  any  Federal  reserve  bank;  and  when  deposited  witli  siicli 
bank  for  redemption  may  be  charged  off  by  said  bank  against 
Treasury  balances  on  its  books,  or  may  be  paid  out  of  its  law- 
ful money  funds  specifically  set  apart  for  their  redemption. 

Any  Federal  reserve  bank  may,  upon  vote  of  its  directors, 
make  application  to  the  Federal  Eeserve  Board  through  the 
local  Federal  reserve  agent  for  such  amount  of  the  Treasury 
notes  hereinbefore  provided  for  as  it  may  deem  best.  Such 
application  shall  be  accompanied  with  a  tender  to  the  local 
Federal  reserve  agent  of  collateral  security  to  protect  the  notes 
for  which  application  is  made,  equal  in  amount  to  the  sum  of 
the  notes  thus  applied  for.  The  collateral  security  thus  offered 
shall  be  notes  and  bills  accepted  for  rediscount  under  tlic  pro- 
visions of  sections  thirteen,  fourteen,  and  fifteen  of  this  Act, 
and  the  Federal  Eeserve  Board  shall  be  authorized  at  any  time 
to  call  upon  a  Federal  reserve  bank  for  additional  deposits  of 
security. 

Whenever  any  Federal  reserve  bank  shall  pay  out  or  dis- 
burse Federal  reserve  Treasury  notes  of  the  issue  herein  pro- 
vided it  shall  segregate  in  its  own  vaults  and  shall  carry  to  a 
special  account  on  its  books  gold  or  lawful  money  equal  in 
amount  to  thirty-three  and  one-third  per  centum  of  the  Treas- 
ury notes  so  paid  (nit  by  it.  The  Federal  Eeserve  Board  shall 
have  ]iower.  in  its  discretion,  to  require  Federal  reserve  banks 

69 


The  Bill. 

to  maintain  on  deposit  in  the  Treasury  of  the  United  States  a 
sum  in  gold  or  lawful  money  equal  to  five  per  centum  of  such 
amount  of  Federal  Eeserve  Treasury  notes  as  may  be  issued  to 
them  under  the  provisions  of  this  Act ;  but  such  five  per  centum 
sli^ll  be  counted  and  included  as  part  of  the  thirty-three  and 
one-third  per  centum  reserve  hereinbefore  required.  The  said 
Board  shall  also  have  the  right  to  grant  in  whole  or  in  part  or 
to  reject  entirely  the  application  of  any  Federal  Reserve  bank 
for  Federal  Eeserve  Treasury  notes;  but  to  the  extent  and  in 
the  amount  that  such  application  may  be  granted  the  Federal 
Eeserve  Board  shall,  through  its  local  Federal  reserve  agent, 
deposit  Treasury  notes  with  the  bank  so  applying,  and  such 
bank  shall  be  charged  with  the  amount  of  such  notes  and  shall 
pay  such  rate  of  interest  on  said  amount  as  may  be  established 
by  the  Federal  Eeserve  Board,  and  the  amount  of  such  Treasury 
notes  so  issued  to  any  such  bank  shall,  upon  delivery,  become  a 
first  and  paramount  lien  on  all  the  assets  of  such  bank. 

Any  Federal  reserve  bank  may  at  any  time  reduce  its  lia- 
bility for  outstanding  Federal  reserve  Treasury  notes  by  the 
deposit  of  Federal  reserve  Treasury  notes  whether  issued  to  such 
bank  or  to  some  other  member  bank,  other  lawful  money  of  the 
United  States,  or  gold  bullion,  with  the  Federal  reserve  agent 
or  with  the  Treasurer  of  the  United  States,  and  such  reduction 
shall  be  accompanied  by  a  corresponding  reduction  in  the  re- 
serve fund  of  lawful  money  set  apart  for  the  redemption  o* 
said  notes  and  by  the  release  of  a  corresponding  amount  of  tne 
collateral  security  deposited  with  the  local  Federal  reserve  agent. 

Any  Federal  reserve  bank  may  at  its  discretion  withdraw 
collateral  deposited  with  the  local  Federal  reserve  agent  J'or 
the  protection  of  Federal  reserve  Treasury  notes  deposited  witb 
it  and  shall  at  the  same  time  substitute  other  collateral  of  equal 
value  approved  by  the  Federal  reserve  agent  under  regulations 
to  be  prescribed  ])y  the  Federal  Eeserve  Board. 

It  shall  be  the  duty  of  every  Federal  reserve  bank  to  re- 
ceive on  deposit,  at  par  and  without  charge  for  exchange  or 
collection,  checks  and  drafts  drawn  upon  any  of  its  depositors 
or  by  any  of  its  depositors  upon  any  other  depositor  and  checks 
and  drafts  drawn  by  any  depositor  in  any  other  Federal  reserve 
1)ank  upon  funds  to  the  credit  of  said  depositor  in  said  reserve 
bank  last  mentioned.  The  Federal  Eeserve  Board  shall  make 
and  promulgate  from  time  to  time  regulations  governing  the 
transfer  of  funds  at  par  among  Federal  Eeserve  Banks,  and 
may  at  its  discretion  exercise  the  functions  of  a  clearing  house 
for  sucb  Federal  reserve  banks,  and  may  also  require  each  such 
bank  to  exercise  the  functions  of  a  clearing  house  for  its  share- 
holding banks. 

70 


The  Bill. 

Sec.  18.  ThiiL  no  naiiunal  banking  association  shall  Ijc 
entitled  to  receive  from  the  Comptroller  of  the  Currency  or  to 
issue  circulating  notes  in  excess  of  the  total  amount  of  such 
notes  which  such  bank  may  have  outstanding  at  the  passage  of 
this  Act,  and  no  national  banking  association  which  may  in 
future  reduce  its  outstanding  circulating  notes  in  the  manner ' 
prescribed  by  law  shall  hereafter  be  entitled  to  receive  from  the 
Comptroller  of  the  Currency  or  to  issue  circulating  notes  in 
excess  of  tlie  sum  to  whicli  its  outstanding  notes  shall  have  been 
reduced  by  such  withdrawals. 

Skc.  19.  That  so  much  of  the  provisions  of  section  fifty- 
one  hundred  and  fifty-nine  of  the  Revised  Statutes  of  the 
United  States,  and  section  four  of  the  Act  of  June  twentieth, 
eighteen  hundred  and  seventy-four,  and  section  eight  of  the 
Act  of  July  twelfth,  eighteen  hundred  and  eighty-two,  and  of 
any  other  provisions  of  existing  statutes,  as  require  that  before 
any  national  banking  association  shall  be  authorized  to  com- 
mence banking  business  it  shall  transfer  and  deliver  to  the 
Treasurer  of  the  United  States  United  States  registered  bonds 
to  an  amount,  where  the  capital  is  $150,000  or  less,  not  less  than 
one-fourth  of  its  capital  stock,  and  $50,000  where  the  capital  is 
in  excess  of  $150,000,  be,  and  the  same  is  hereby,  repealed. 

REFUNDING  BONDS. 

Sec.  20.  Upon  application  the  Secretary  of  the  Treasury 
shall  exchange  the  two  per  centum  bonds  of  the  United  States 
l)caring  the  circulation  privilege  theretofore  deposited  l)y  any 
national  banking  association  with  the  Treasurer  of  the  United 
States  as  security  for  circulating  notes  for  three  per  centum 
bonds  of  the  United  States  without  the  circulation  privilege, 
payable  after  twenty  years  from  date  of  issue,  and  exempt  from 
Federal,  State,  and  municipal  taxation  both  as  to  income  and 
principal.  When  and  in  proportion  as  the  outstanding  two  per 
centum  bonds  deposited  with  the  Treasurer  shall  be  thus  ex- 
changed or  refunded,  the  power  of  national  banks  to  issue  circu- 
lating notes  secured  by  United  States  bonds  shall  cease  and 
terminate.  Every  national  bank  may  continue  to  apply  for  and 
receive  from  the  Comptroller  of  the  Currency  circulating  notes 
under  the  conditions  provided  by  this  Act.  but  no  national  bank 
shall  be  permitted  to  issue  circulating  notes  of  any  description 
or  to  issue  or  to  make  use  of  any  substitute  for  such  circulating 
notes  in  the  form  of  clearing-house  certificates,  cashier's  checks, 
or  other  obligation  not  specifically  provided  for  under  this 
Act,  and  no  national  bank  shall,  without  consent  of  the  Sec- 
retary of  the  Treasury,  in  any  one  year  present  two  per  centum 
bonds  for  exchange  in  the  manner  hereinbefore  provided  to  an 

71 


The  Bill. 

amount  exceeding  five  per  centum  of  the  total  amount  of  bonds 
on  deposit  with  the  Treasurer  by  said  bank  at  the  time  of  the 
passage  of  this  Act.  At  the  expiration  of  twenty  years  from 
the  passage  of  this  Act  every  holder  of  United  States  two  per 
centum  bonds  then  outstanding  shall  receive  in  exchange  three 
per  centum  bonds  of  like  denomination  payable  twenty  years 
from  date  of  issue,  and  without  the  circulation  privilege.  After 
twenty  3'ears  from  the  date  of  the  passage  of  this  Act  national- 
bank:  notes  still  remaining  outstanding  shall  be  recalled  and 
redeemed  by  the  national  banking  associations  issuing  the  same 
within  a  period  and  under  regulations  to  be  prescribed  by  the 
Federal  Eeserve  Board,  and  notes  still  remaining  in  circulation 
at  the  end  of  such  period  shall  be  secured  by  an  equal  amount 
of  lawful  money  deposited  in  the  Treasury  of  the  United  States 
by  the  banking  associations  originally  issuing  such  notes. 

BANK  RESERVES. 

Sec.  21.  That  within  sixty  days  from  and  after  the  date 
when  the  Secretary  of  the  Treasury  shall  have  officially  an- 
nounced, in  such  manner  as  he  shall  elect,  the  fact  that  a  Fed- 
eral reserve  bank  has  been  established,  every  national  banking 
association  shall  establish  with  the  Federal  reserve  bank  of  its 
district  a  credit  balance  on  the  books  of  the  latter  institution 
equal  to  not  less  than  three  per  centum  of  its  own  total  demand 
liabilities,  exclusive  of  circulating  notes,  and  at  the  end  of 
fourteen  months  from  the  date  fixed  by  the  Secretary  of  the 
Treasury  shall  increase  the  said  three  per  centum  to  five  per 
centum.  Such  balance  may  at  any  time  be  increased,  but  shall 
at  no  time  be  allowed  to  fall  below  the  amounts  aforesaid. 

From  and  after  the  date  set  by  the  Secretary  of  the  Treas- 
ury and  officially  announced  by  him  as  hereinbefore  provided,  it 
shall  be  the  duty  of  national  banking  associations  now  classified 
as  country  banks  and  situated  outside  of  central  reserve  and 
reserve  cities  to  maintain  a  reserve  equal  to  fifteen  per  centum 
of  the  aggregate  amount  of  their  deposits.  Such  reserve  shall 
consist  of  five  per  centum  of  lawful  money  lield  actually  in  their 
own  vaults  and  for  a  period  of  fourteen  months  from  the  date 
aforesaid  shall  consist  of  at  least  three  per  centum  and  there- 
after of  at  least  five  per  centum,  with  its  district  Federal  re- 
serve bank.  The  remainder  of  the  fifteen  per  centum  reserve 
hereinbefore  required  may  for  a  period  of  thirty-six  months  from 
and  after  the  date  set  by  the  Secretary  of  the  Treasury,  as  here- 
inbefore provided,  consist  of  balances  due  to  a  national  bank  in 
reserve  or  central  reserve  cities  as  now  defined  by  law.  From 
and  after  a  date  thirty-six  months  subsequent  to  the  date  set  by 
the   Sccrctiiry   of  the   Treasury,   as   hercinliefore    provided,   the 

72 


The  BUI. 

said  reiiuiiuder  oi'  the  lil'lecii  per  centum  reserve  required  of 
country  banks  shall  consist  either  of  lawful  money  in  its  own 
vaults  or  of  balances  on  deposit  with  the  Federal  reserve  bank 
of  its  district  or  both :  Provided,  That  the  Federal  Reserve 
Board  may,  in  its  discretion,  permit  said  remainder  of  fifteen 
per  centum  reserve  required  of  country  banks  to  consist  of 
balances  on  deposit  with  any  l)ank  in  a  reserve  or  central  re- 
serve city  as  defined  by  law. 


BANKS  IN  RESERVE  CITIES. 

From  and  after  the  date  set  by  the  Secretary  of  the  Treas- 
ury for  the  incorporation  of  the  Federal  reserve  bank  within 
such  district  it  shall  be  the  duty  of  the  national  banks  in  such 
reserve  cities  to  maintain  for  a  period  of  twenty-six  months  a 
reserve  of  twenty-five  per  centum  of  their  outstanding  deposits 
and  for  twelve  months  thereafter  a  reserve  of  twenty-two  and 
one-half  per  centum,  and  at  the  end  of  thirty-eight  months,  and 
permanently  thereafter,  a  reserve  of  twenty  per  centum  of  their 
outstanding  deposits.  For  sixty  days  from  the  date  set  by  the 
Secretary  for  the  organization  of  the  reserve  bank  in  such  dis- 
trict each  national  bank  in  the  reserve  cities  shall  maintain  in 
its  own  vaults,  in  lawful  money,  a  sum  equal  to  twelve  and 
one-half  per  centum  of  its  outstanding  deposits  and  thereafter  a 
sum  of  lawful  money  equa^  to  ten  per  centum  of  its  deposits. 
Tlie  additional  legal  reserve  above  the  lawful  money  required 
in  its  own  vaults  may  be  kept  either  with  the  Federal  reserve 
bank  or  with  a  reserve  agent  in  the  central  reserve  cities,  for 
ft  period  not  exceeding  thirty-six  months  from  the  organization 
of  the  Federal  reserve  bank  in  such  district:  Provided,  lioio- 
ever.  That  the  requirement  of  a  balance  of  three  per  centum 
and  five  per  centum,  respectively,  of  its  deposits  with  the  Fed- 
eral reserve  bank  of  its  district,  as  hereinl-)efore  provided,  shall 
not  be  diminished. 

CENTRAL  RESERVE  CITY  BANKS. 

The  national  banks  in  central  reserve  cities,  for  a  period 
of  fourteen  months,  shall  maintain  a  reserve,  in  lawful  money, 
equal  to  twenty-five  per  centum  of  their  deposits  and  there- 
after, for  a  further  period  of  twelve  months,  a  reserve  in  lawful 
money  equal  to  twenty-two  and  one-half  per  centum  of  their 
deposits  and  after  twenty-six  months  they  shall  maintain  a 
reserve  in  lawful  money  equal  to  twenty  per  centum  of  their 
outstanding  deposits.  For  a  period  of  sixty  days  after  the 
passage  of  this  Act  each  such  bank  shall  maintain^  in  its  own 
vaults,  in  lawful  money,  a  sum  e(iual  to  twenty  per  centum  of 


The  Bill. 

its  deposits,  and  thereafter,  in  lawful  money,  ten  per  centum 
of  its  deposits.  It  shall  be  optional  with  such  banks  to  keep 
their  reserve,  in  addition  to  the  lawful  money  required  to  be  kept 
by  them  as  aforesaid,  either  in  their  own  vaults  or  as  a  deposit 
with  the  Federal  reserve  bank  of  the  district  in  which  such 
national  bank  is  located:  Provided,  however,  That  the  re- 
((Uirement  of  a  balance  of  three  per  centum  and  five  per  centum 
respectively,  with  the  Federal  reserve  bank  of  its  district,  as 
hereinbefore  provided,  shall  not  be  diminished. 

Sec.  22.  That  so  much  of  sections  two  and  three  of  the 
Act  of  June  twentieth,  eighteen  hundred  and  seventy-four,  en- 
titled "An  Act  fixing  the  amount  of  United  States  notes,  pro- 
viding for  a  redistribution  of  the  national  bank  currency,  and 
for  other  purposes,"  as  provides  that  the  fund  deposited  by 
any  national  banking  association  with  the  Treasurer  of  the 
United  States  for  the  redemption  of  its  notes  shall  be  counted 
as  a  part  of  its  lawful  reserve  as  provided  in  the  Act  aforesaid, 
be,  and  the  same  is  hereby,  repealed.  And  from  and  after  the 
passage  of  this  Act  such  fund  of  five  per  centum  shall  in  no 
case  be  counted  by  any  national  banking  association  as  a  part 
of  its  lawful  reserve. 

Sec.  23.  That  every  Federal  reserve  bank  shall  at  all 
times  have  on  hand  in  its  own  vaults,  in  gold  or  lawful  money, 
a  sum  equal  to  not  less  than  thirty-three  and  one-third  per 
centum  of  its  outstanding  demand  liabilities. 

BANK   EXAMINATIONS. 

Sec.  24.  That  the  examination  of  the  affairs  of  every 
national  banking  association  authorized  by  existing  law  shall 
take  place  at  least  twice  in  each  calendar  year  and  as  much 
oftener  as  the  Federal  Eeserve  Board  shall  consider  necessary 
in  order  to  furnish  a  full  and  complete  knowledge  of  its  con- 
dition. The  Secretary  of  the  Treasury  may,  however,  at  any 
time  direct  the  holding  of  a  special  examination.  The  person 
assigned  to  the  making  of  such  examination  of  the  affairs  of  any 
national  banking  association  shall  have  power  to  call  together  a 
quorum  of  the  directors  of  such  association,  who  shall,  under 
oath,  state  to  such  examiner  the  character  and  circumstances  of 
such  of  its  loans  or  discounts  as  he  may  designate;  and  from 
and  after  the  passage  of  this  Act  all  bank  examiners  shall  re- 
ceive fixed  salaries,  the  amount  whereof  shall  be  determined  by 
the  Federal  Reserve  Board  and  shall  be  annually  reported  to 
Congrfss.  But  the  expense  of  the  examinations  herein  provided 
for  shall  be  assessed  by  the  Federal  Reserve  Board  upon  the 
associations  examined  in  proportion  to  assets  or  resources  held 
by  such  associations  upon  a  date  during  the  year  in  which  said 

74 


The  Bill. 

examinations  arc  lifkl  to  be  established  by  the  i^'ederal  Ueservc 
Board.  The  Comptroller  of  the  Currency  shall  so  arrange  the 
duties  of  national  bank  examiners  that  no  two  successive  ex- 
aminations of  any  association  shall  be  made  by  the  same 
examiner. 

In  addition  to  the  examinations  made  and  conducted  by 
the  Comptroller  of  the  Currency,  every  Federal  reserve  bank 
may,  with  the  approval  of  the  Federal  Reserve  Board,  arrange 
for  special  or  periodical  examination  of  the  member  banks 
within  its  district.  Such  examination  shall  be  so  conducted  as 
to  inform  the  Federal  reserve  bank  under  whose  ausj)ices  it  is 
carried  on  of  the  condition  of  its  member  banks  and  of  the  lines 
of  credit  which  are  being  extended  by  them.  Every  Federal  re- 
serve bank  shall  at  all  times  be  bound  to  furnish  to  the  Federal 
Eeserve  Board  such  information  as  may  be  demanded  by  the 
latter  concerning  the  condition  of  any  national  l)anking  asso- 
ciation organized  within  the  district  in  which  the  said  Fed- 
eral reserve  bank  is  located,  and  it  shall  have  power  at  all  times 
to  order  special  examinations  without  notice,  for  the  purpose  of 
ascertaining  the  condition  of  a  member  bank. 

The  Federal  Eeserve  Board  shall  as  often  as  it  deems  best, 
and  in  any  case  not  less  'frequently  than  four  times  each  year, 
order  an  examination  of  national  l)anking  associations  in  reserve 
cities.  Such  examinations  shall  show  in  detail  the  total  amount 
of  loans  made  by  each  bank  on  demand,  on  time,  and  the  differ- 
ent classes  of  collateral  held  to  protect  the  various  loans. 

Sec.  25.  That  no  national  bank  shall  hereafter  make 
any  loan  or  grant  any  gratuity  to  any  examiner  of  such  bank. 
Any  bank  offending  against  this  provision  shall  be  deemed 
guilty  of  a  misdemeanor  and  shall  be  fined  not  more  than 
$1,000,  and  a  furtlier  sum  equal  to  the  money  so  loaned  or 
gratuity  given ;  and  the  oflficer  or  ofhcers  of  a  bank  making 
such  loan  or  granting  such  gratuity  shall  be  likewise  deemed 
guilty  of  a  misdemeanor  and  shall  be  fined  not  to  exceed  $500. 
Any  examiner  accepting  a  loan  or  gratuity  from  any  bank 
examined  hy  him  shall  be  deemed  guilty  of  a  misdemeanor 
and  shall  be  fined  not  more  than  $500,  and  a  further  sum  equal 
to  the  money  so  loaned  or  gratuity  given,  and  shall  forever 
thereafter  he  disqualified  from  holding  office  as  a  national 
bank  examiner.  Xo  national  bank  cxaminor  shall  perform 
any  other  service  for  compensation  while  holding  such  office. 

No  officer  or  director  of  a  national  bank  shall  receive  or 
be  beneficiary,  either  directly  or  indirectly,  of  any  fee. 
brokerage,  commission,  gift,  or  other  consideration  for  or  on 
account  of  any  loan,  purchase,  sale,  payment,  exchange,  or 
transaction  made  by  or  on  belialf  of  a  national  bank  of  which 

7h 


The  BUI. 

he  is  such  officer  or  director.  Any  person  violating  any 
provision  of  this  Act  shall  be  punished  by  a  line  of  not 
exceeding  $5,000,  or  by  a  term  in  the  penitentiary  not 
exceeding   three   years,   or   both    such   fine   and   imprisonment. 

Sec.  26.  That  from  and  after  the  passage  of  this  Act  the 
stockholders  of  every  national  banking  association  shall  be 
held  individually  responsible  for  all  contracts,  debts,  and 
engagements  of  such  association,  each  to  the  amount  of  his 
stock  therein,  at  the  par  value  thereof  in  addition  to  the 
amount  invested  in  such  stock.  The  stockholders  in  any 
national  banking  association  who  shall  have  transferred  their 
shares  or  registered  the  transfer  thereof  within  sixty  days 
next  before  the  date  of  the  failure  of  such  association  to  meet 
its  obligations  shall  be  liable  to  the  same  extent  as  if  they  had 
made  no  such  transfer;  but  this  provision  shall  not  be  con- 
strued to  affect  in  any  way  any  recourse  which  such  share- 
holders might  otherwise  have  against  those  in  whose  names 
such  shares  are  registered  at  the  time  of  such  failure.  Sec- 
tion fifty-one  hundred  and  fifty-one,  Eevised  Statutes  of  the 
United  States,  is  hereby  reenacted  except  in  so  far  as  modi- 
fied by  this  section. 

LOANS    ON   FARM    LANDS. 

Sec.  27.  That  any  national  banking  association  not 
situated  in  a  reserve  city  or  central  reserve  city  may  make 
loans  secured  by  improved  and  unencumbered  farm  land,  and 
so  much  of  section  fifty-one  hundred  and  thirty-seven  of  the 
Eevised  Statutes  as  prohibits  the  making  of  such  loans  by 
banks  so  situated  shall  be,  and  the  same  is  hereby,  repealed ; 
but  no  such  loan  shall  be  made  for  a  longer  time  than  nine 
months,  nor  for  an  amount  exceeding  fifty  per  centum  of  the 
actual  value  of  the  property  offered  as  security,  and  such 
property  shall  be  situated  within  the  Federal  reserve  district 
in  which  the  bank  is  located.  Any  such  bank  may  make 
such  loans  in  an  aggregate  sum  equal  to  twenty-five  per 
centum  of  its  capital  and  surplus,  or  fifty  per  centum  of  its 
time  deposits. 

The  Federal  Eescrve  Board  shall  have  power  from 
time  to  time  to  add  to  the  list  of  cities  in  which  national 
banks  shall  not  be  permitted  to  make  loans  secured  upon  real 
estate  in  the  manner  described  in  this  section. 

FOREIGN  BRANCHES. 

Sec.  28.  That  any  national  banking  association  possess- 
ing a  capital  of  $1,000,000  or  more  may  file  application  with 

76 


The  Hill. 

the  Federal  lieserve  Board,  upon  such  eoudilioiis  and  under 
such  circumstances  as  may  be  prescribed  by  the  said  board, 
for  the  purpose  of  securing  authorization  to  establish  branches 
in  foreign  countries  for  the  furtherance  of  the  foreign  com- 
merce of  the  United  States  and  to  act,  if  required  to  do  so, 
as  fiscal  agents  of  the  United  States.  Such  application  shall 
specify,  in  addition  to  the  name  and  capital  of  the  banking 
association  filing  it,  the  foreign  country  or  countries  or  the 
dependencies  of  the  United  States  where  the  banking  opera- 
tions proposed  are  to  be  carried  on  and  the  amount  of  capital 
set  aside  by  the  said  banking  association  fding  application 
for  the  conduct  of  its  foreign  business  at  the  branches  proposed 
b}-^  it  to  be  establislied  in  foreign  countries.  The  Federal 
Eeserve  Board  shall  have  power  to  reject  such  application  if, 
in  its  judgment,  the  amount  of  capital  proposed  to  be  set 
aside  for  the  conduct  of  foreign  Inisiness  is  inadequate  or  if 
for  other  reasons  the  granting  of  such  application  is  deemed 
inexpedient. 

Every  national  banking  association  wliich  shall  receive 
authorization  to  establish  ])ranches  in  foreign  countries 
shall  be  required  at  all  times  to  furnish  information  con- 
cerning the  condition  of  such  branches  to  the  Comptroller 
of  the  Currency  upon  demand,  and  the  Federal  Reserve 
Board  may  order  special  examinations  of  the  said  for- 
eign branches  at  such  time  or  times  as  it  may  deem  best. 
Every  such  national  banking  association,  Bhall  conduct  the 
accounts  of  each  foreign  branch  independently  of  the 
accounts  of  other  foreign  branches  established  by  it  and  of 
its  home  office,  and  shall  at  the  end  of  each  fiscal  period 
transfer  to  its  general  ledger  the  profit  or  loss  accruing  at 
each  such  branch  as  a  separate  item. 

Sec.  29.  That  all  provisions  of  law  inconsistent  with  or 
superseded  by  any  of  the  provisions  of  this  Act  be,  and  the 
same  are  hereby,  repealed. 


77 


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UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 


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